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Conagra's (CAG) Q1 Earnings Beat Estimates, Sales Up Y/Y

Zacks Equity Research

Conagra Brands, Inc. CAG released first-quarter fiscal 2020 results, wherein earnings beat the Zacks Consensus Estimate but sales missed the same. Nonetheless, the top line surged year over year on the back of gains from the inclusion of Pinnacle Foods, partly countered by divestitures of the Wesson oil business, Gelit, the Trenton production facility and the Canadian Del Monte business (also known as “Sold Businesses”).

Let’s take a closer look at the quarterly outcome.

Earnings & Sales

Conagra’s quarterly adjusted earnings came in at 43 cents, which surpassed the Zacks Consensus Estimate of 39 cents. However, the figure declined 8.5% year over year. The year-over-year decline was caused by higher outstanding share count, loss of profits from divestitures, increased interest expenses and lower earnings in the Ardent Mills joint venture.

Conagra Brands Inc. Price, Consensus and EPS Surprise



Conagra Brands Inc. Price, Consensus and EPS Surprise

Conagra Brands Inc. price-consensus-eps-surprise-chart | Conagra Brands Inc. Quote

 

Conagra generated net sales of $2,390.7 million, which advanced 30.3% year over year but missed the Zacks Consensus Estimate of $2,480 million. Sales growth was driven by contributions from the Pinnacle Foods buyout. However, divestiture of Sold Businesses weighed on sales. Additionally, foreign currency translations hurt sales by 0.1%.

Moreover, organic sales slipped 1.7%, mainly due to soft volumes. This was somewhat compensated by improved price/mix.

Gross Margin

Adjusted gross profit surged 29% to $676 million, backed by the net impact of Pinnacle Foods’ inclusion, improved price/mix and supply-chain efficiencies. This was countered by lost profits from Sold Businesses, lower organic sales and inflated input costs.

Adjusted gross margin contracted 29 basis points to 28.3%. The buyout of Pinnacle Foods was dilutive to the gross margin by roughly 46 bps.

Segmental Details

From the first quarter of fiscal 2020, Conagra no longer reports Pinnacle Foods as a separate segment. Pinnacle Foods’ operations are allocated to the company’s four Legacy reporting segments.

Grocery & Snacks: Quarterly sales in the segment came in at $978 million, which increased 26.9% year over year owing to contributions from Pinnacle Foods, somewhat offset by the divestiture of the Wesson oil business. Organic sales fell 3.7%, with volumes down 3%. Further, price/mix fell 0.7% as improved pricing and mix were countered by greater brand-building investments with retailers.

Refrigerated & Frozen: Net sales surged 51% to $959 million. Gains from Pinnacle Foods were partly negated by Gelit’s divestiture. Organic sales climbed 1.5%, with volumes and price/mix up 0.2% and 1.3%, respectively.

International: Net sales grew 5.5% to $204 million, thanks to Pinnacle Foods’ acquisition. This was offset by the divestiture of the Canadian Del Monte and Wesson oil businesses as well as adverse currency movements. On an organic basis, net sales dipped 3%. Volumes descended 4.7%, while price/mix rose 1.7%

Foodservice: Quarterly sales in the segment grew 6.3% year over year to $250 million, primarily owing to Pinnacle Foods’ inclusion, somewhat negated by the sale of the Wesson oil business and the Trenton facility. Organic sales declined 3.2% in the reported quarter, with volumes down 6.4% but price/mix up 3.2%.

Other Financial Fundamentals

Conagra, which shares space with General Mills GIS, exited the quarter with cash and cash equivalents of $64.7 million, senior long-term debt (excluding current portion) of $10,127.5 million and total stockholders’ equity of $7,516.8 million. During the first quarter, the company generated net cash of $207 million from operating activities.

During the quarter, Conagra paid out a quarterly dividend of 21.25 cents per share.

Business Development

Earlier this month, the company inked a deal to divest its DSD snacks business, which is expected to close before the end of the calendar year 2019.
 
Guidance


Conagra reiterated its view for fiscal 2020, wherein organic sales are expected to increase roughly 1-1.5%. On a reported basis, net sales are expected to rise 13.5-14%. Further, management projects the adjusted operating margin to be 16.2-16.8%.

Adjusted earnings for the fiscal year are anticipated to be $2.08-$2.18 per share. The midpoint of $2.13 stands above the current Zacks Consensus Estimate of $2.11.  

Conagra still expects organic sales and bottom-line growth to be stronger in the second half of fiscal 2020 compared to the first half. This is accountable to the timing of innovation and synergy generation along with solid brand-building investments during the first half of the fiscal, among other factors.

Conagra currently carries a Zacks Rank #3 (Hold). Shares of the company have gained 18.5% in the past three months compared with the industry’s growth of 7.3%.

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