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Conagra (CAG) Q3 Earnings Surpass Estimates, Sales Up Y/Y

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Conagra Brands, Inc. CAG posted robust third-quarter fiscal 2021 results, with the top and the bottom line increasing 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.

Q3 in Detail

Conagra’s quarterly adjusted earnings came in at 59 cents, which surpassed the Zacks Consensus Estimate of 58 cents. Moreover, the figure increased 25.5% from the year-ago quarter’s figure. The year-over-year upside can be mainly attributed to increased gross profit.

Conagra generated net sales of $2,771.1 million, which advanced 8.5% year over year and beat the Zacks Consensus Estimate of $2,720.3 million. The year-over-year sales growth was backed by higher organic sales, partly offset by divestitures of the Lender's bagel business, H.K. Anderson business, Peter Pan peanut butter 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 9.7% 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, temporary supply chain disruption owing to a winter storm was a drag on the performance. Further, price/mix primarily benefited from favorable mix, reduced promotional activity and inflation-justified pricing in Foodservice business.

CONAGRA BRANDS Price, Consensus and EPS Surprise

CONAGRA BRANDS Price, Consensus and EPS Surprise
CONAGRA BRANDS Price, Consensus and EPS Surprise

CONAGRA BRANDS price-consensus-eps-surprise-chart | CONAGRA BRANDS Quote

Adjusted gross profit increased 8.9% to $761 million, while adjusted gross margin expanded 12 basis points to 27.5%. The uptick 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 as well as profit that was lost from Sold Businesses.

Adjusted EBITDA improved 9.9% to $566 million, backed by increase in adjusted gross profit.

Adjusted selling, general, and administrative expense, excluding advertising and promotional expense, grew 5.2% to $244 million mainly due to increased incentive compensation and higher commissions expense. Nevertheless, positive impacts from synergies, pandemic-induced savings as well as lower travel expense offered some respite.

Segmental Details

Grocery & Snacks: Quarterly net sales in the segment came in at $1,133.1 million, up 10.8% year over year owing to higher organic sales. The figure was partially hurt by the Sold Businesses. Organic sales increased 13.1% with volumes and price/mix up 9.4% and 3.7%, respectively, on an organic basis. Volumes rose owing to consumers’ higher at-home consumption. Management highlighted that several of the company’s snacks and staples brands experienced strong organic sales growth. Further, price/mix was mainly driven by lower promotional activity and favorable mix.

Refrigerated & Frozen: Net sales advanced 11.7% to $1,203.1 million. Organic sales rose 12.1%, with volumes up 7.8% and price/mix growth of 4.3% on an organic basis. Higher at home consumption boosted volumes, while lower promotion levels and favorable mix aided the rise in price/mix. Several brands in the segment experienced strong organic sales growth.

International: Net sales rose 9% to $240.9 million on account of higher organic sales, offset by unfavorable currency movements and declines from Sold Businesses. On an organic basis, net sales rose 9.8%, as volumes increased 6.7% and price/mix was up 3.1% on an organic basis. This was backed by higher demand amid the pandemic. In particular, strong growth was witnessed in all regions across snacks, staples and frozen business. Price/mix increased on inflation-justified pricing and favorable mix.

Foodservice: Quarterly sales in the segment declined 17.2% year over year to $194 million due to Sold Businesses impact and lower organic sales. Organic sales fell 16.5%, with volumes down 19.5% on an organic basis. The downside was caused by reduced restaurant traffic amid the pandemic. Nevertheless, price/mix went up 3%.

Other Updates

Conagra exited the quarter with cash and cash equivalents of $80.7 million, senior long-term debt (excluding current installments) of $8,278.1 million and total stockholders’ equity of $8,329.8 million. During the 39-weeks ended Feb 28, the company generated net cash of $1,070 million from operating activities.

During the third quarter, Conagra paid out a quarterly dividend of 27.5 cents per share. During the quarter, the company repurchased nearly 8.8 million shares of its common stock for $298 million.

On Jan 25, 2021, the company concluded the divestitureof its Peter Pan peanut butter business.The deal is likely to reduced annual reported net sales by nearly $110 million and adjusted earnings per share (EPS) by roughly 3 cents.

Guidance

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 to date. Additionally, costs associated with the pandemic and inflation in cost of goods sold has been a drag.

Considering these factors, management expects organic sales decline of 10-12% for the fourth quarter of fiscal 2021. Adjusted operating margin is likely to be 14-15%, while adjusted EPS are envisioned between 49 cents and 55 cents. 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 the range of 18-19% and adjusted EPS for fiscal 2022 is likely to be between $2.63 and $2.73.

This Zacks Rank #3 (Hold) company’s shares have gained 12.5% in the past three months compared with the industry’s rise of 8.7%.

Some Solid Food Stocks

The Hain Celestial HAIN, currently carrying a Zacks Rank #2, has a trailing four-quarter earnings surprise of 26.7%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Mondelez International, Inc. MDLZ, currently carrying a Zacks Rank #2, has a long-term earnings growth rate of 8.3%.

The J. M. Smucker Company SJM, currently carrying a Zacks Rank #2, has a long-term earnings growth rate of 1.8%.

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