Prudent Innovations Drive Conagra (CAG), High Costs Persist

Conagra Brands, Inc. CAG looks well placed; courtesy of focus on innovations as well as efforts to boost Frozen and Snacks categories. Moreover, the company’s retail business is doing well, backed by rising at-home consumption. That being said, softness in Foodservice segment along with escalated costs is a headwind.

Let’s delve deeper.

Factors Working in Conagra’s Favor

Conagra is strongly committed toward undertaking innovation, which is clearly working well for the company. Even amid the pandemic, the company has been focused on carrying out innovation for its customers as well as consumers. In fact, the company witnessed favorable consumer and customer response for its new products during the quarter. Management, in its last earnings call, highlighted that its innovation performance exceeded the 15% target in the past two fiscal years and the last 52 weeks. Moreover, the company is beginning to see solid customer acceptance for its fiscal 2022 innovation.

Conagra has been focused on boosting the Frozen and Snacks businesses. In the third quarter of fiscal 2021, total Conagra Frozen retail sales increased 12% year over year. We note that the company’s Frozen category has picked up more pace in the current situation, with the pandemic causing people to work from home and eat at home. During the quarter, the company’s Grocery & Snacks business sales gained 10.8%. The company’s snacks business continued to gain from higher volumes stemming from rising at-home consumption. Well, management expects at-home eating trends to stay high for a while and is well positioned to tap opportunities related to it. Conagra is on track with innovations and brand-building efforts for exploring growth prospects in its frozen and snacks businesses.

Apart from this, burgeoning demand amid the pandemic bolstered Conagra’sthird-quarter fiscal 2021 results, with the top and the bottom line increasing year over year as well as beating the Zacks Consensus Estimate. Further, 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.

Further, the company is benefitting from the inclusion of Pinnacle Foods that was acquired in October 2018. The combination of the two companies is appropriate, given the increasing demand for frozen foods and snacks. The consolidation of these food companies has helped it create a robust portfolio of leading, iconic and on-trend brands. Further, the move is helping Conagra ramp up innovation and exploit the long-term benefits in the frozen foods space. During third-quarter earnings call, management noted that it generated total synergies of $270 million from Pinnacle Foods’ buyout, year to date. The company stated that it expects synergies worth $305 million (excluding pandemic-led costs) by the end of fiscal 2022.

Roadblocks on Way

While coronavirus-led increased at-home trends have boosted Conagra’s retail business, the same is dealing a blow to the Foodservice segment. Incidentally, sales in the segment declined 17.2% due to Sold Businesses impact and lower organic sales in the fiscal third quarter. Organic sales fell 16.5%, with volumes down 19.5% on an organic basis in the segment. The downtick was caused by reduced restaurant traffic amid the pandemic.

Apart from this, costs associated with COVID-19, input cost inflation as well as increased transportation costs put pressure on the company’s performance in the fiscal third quarter. Notably, inflation increased 3.9% thanks to the broad-based impact on the cost of materials, manufacturing as well as transportation and logistics. In fact, management, per the last earnings call anticipated the rate of inflation to keep rising in the upcoming few quarters.

We note that, a number of players in the food space like Lamb Weston Holdings, Inc. LW, McCormick & Company MKC and Pilgrim's Pride Corporation PPC are grappling with pandemic-induced costs.

Coming back to Conagra, we believe that the aforementioned upsides are likely to help the company keep its growth story going.

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