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A month has gone by since the last earnings report for CONAGRA BRANDS (CAG). Shares have added about 2.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is CONAGRA BRANDS due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Conagra Q2 Earnings Surpass Estimates, Sales Up Y/Y
Conagra posted robust second-quarter fiscal 2021 results, with the top and the bottom line surging year over year and beating the Zacks Consensus Estimate. Results were backed by increased organic sales, which benefited from higher at-home consumption, driving Conagra’s retail business. This also helped the company offset softness in the Foodservice segment.
Management is encouraged with continued growth of its retail business and has therefore provided an optimistic view for the third quarter. However, Foodservice business is expected to remain sluggish, as outdoor dining is yet to pick up pace.
Q2 in Detail
Conagra’s quarterly adjusted earnings came in at 81 cents, which surpassed the Zacks Consensus Estimate of 73 cents. Moreover, the figure jumped 28.6% from the year-ago quarter’s figure. The year-over-year upside can be attributed to increased adjusted net income.
Conagra generated net sales of $2,995.2 million, which advanced 6.2% year over year and beat the Zacks Consensus Estimate of $2,992 million. The year-over-year sales growth was backed by higher organic sales, partly offset by adverse currency movements and the divestiture of Direct Store Delivery (DSD) snacks business, Lender's bagel business, H.K. Anderson business as well as the exit of the private label peanut butter business. The divestitures are collectively referred to as the Sold Businesses.
Organic sales increased 8.1% on higher volumes and favorable price/mix. Volumes were aided by elevated at-home consumption amid the coronavirus pandemic, which in turn boosted Conagra’s retail business but hurt the Foodservice segment. Also, price/mix was favorable in the quarter, driven by positive sales mix.
Adjusted gross profit jumped 11.4% to $895 million, while adjusted gross margin expanded 139 basis points to 29.9%. This can be attributed to higher sales, strong productivity related to supply chain, favorable margin mix, fixed cost leverage and cost synergies from Pinnacle Foods’ buyout. These were somewhat countered by costs associated with COVID-19, input cost inflation, increased transportation costs, adverse impacts of unfavorable currency rates as well as profit that was lost from Sold Businesses.
Adjusted EBITDA improved 16.7% to $712 million, backed by increase in adjusted gross profit and lower adjusted selling, general and administrative expenses.
Grocery & Snacks: Quarterly sales in the segment came in at $1,285.3 million, which increased 12.5% year over year owing to higher organic sales. The figure was partially hurt by the Sold Businesses. Organic sales increased 15.3% with volumes and price/mix up 13.6% and 1.7%, respectively. Volumes rose owing to consumers’ higher at-home consumption and customer inventory replenishment. Management highlighted that several of the company’s grocery and snacks brands experienced strong sales growth.
Refrigerated & Frozen: Net sales advanced 6.8% to $1,248 million due to the same factor that drove the Grocery & Snacks segment’s sales. Organic sales rose 7.8%, with volumes up 6.4% and price/mix growth of 1.4%. Higher at home consumption boosted volumes, while lower promotion levels aided the rise in price/mix. Several brands in the segment experienced strong organic sales growth.
International: Net sales rose 6.6% to $249.8 million on account of higher organic sales, offset by unfavorable currency movements. On an organic basis, net sales rose 9.1%, as volumes increased 6.4% and price/mix was up 2.7%. This was backed by higher demand amid the pandemic. In particular, strong growth was witnessed in Canada and Mexico.
Foodservice: Quarterly sales in the segment declined 23.1% year over year to $212.1 million due to Sold Businesses impact and lower organic sales. Organic sales fell 21.4%, with volumes down 25.3% but price/mix up 3.9%. Volumes were hurt by reduced restaurant traffic amid the pandemic.
Conagra exited the quarter with cash and cash equivalents of $68 million, senior long-term debt (excluding current portion) of $8,279.7 million and total stockholders’ equity of $8,469.5 million. During the 26-weeks ended Nov 29, the company generated net cash of $541.4 million from operating activities.
During the second quarter, Conagra paid out a quarterly dividend of 21.25 cents per share. Also in the said period, management announced an increase of 29% in its quarterly dividend to 27.50 cents per share. This hike is effective for the third quarter. Notably, the new rate takes the company’s annualized dividend to $1.10 per share.
The company is on track with its de-leveraging goals. It lowered its total gross debt by more than $2.3 billion since it concluded Pinnacle Foods’ buyout through the end of the second quarter. As of the end of the second quarter of fiscal 2021, the company’s net debt to last twelve month’s adjusted EBITDA ratio was 3.6x. Markedly, the company was able to achieve its preset target of Net Leverage Ratio of 3.5x-3.6x ahead of schedule.
On Dec 7, 2020, the Company entered into a definitive agreement to divest its Peter Pan peanut butter business to Post Holdings, Inc. The deal is expected to be closed by the first calendar quarter of 2021.
Management is uncertain about the impact of coronavirus on Conagra’s fiscal 2021 performance. Keeping this in mind, management did not offer any guidance for fiscal 2021.
Nonetheless, the company continued to see a considerable increase in demand in the retail business in the third quarter of fiscal 2021, to date. However, the company continued to witness sluggish demand for foodservice products. Additionally, costs associated with the pandemic have been a drag.
Considering these factors, management expects organic sales growth of 6-8% in the third quarter of fiscal 2021. Adjusted operating margin is likely to be 16-16.5%, while adjusted earnings per share are envisioned between 56 cents and 60 cents. The company’s third-quarter prediction does not take into account the impact of the pending divestiture of Peter Pan peanut butter business. Moreover, third-quarter guidance is based on the assumption that end-to-end supply chain operations will remain smooth.
Apart from this, management reiterated its targets for fiscal 2022. Organic net sales are anticipated to grow 1-2% (three-year CAGR ending fiscal 2022). Adjusted operating margin is expected in a range of 18-19% and adjusted EPS for fiscal 2022 is likely to be between $2.66 and $2.76.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
At this time, CONAGRA BRANDS has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, CONAGRA BRANDS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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