Conagra Brands, Inc. CAG appears to be in a good shape, as it has been benefiting from rising demand amid the pandemic-led increased at-home consumption. Such trends are bolstering the retail business and helping it offset declines in the Foodservice segment. Markedly, these trends were witnessed in first-quarter fiscal 2021 results, wherein the top and bottom lines increased year over year and beat the consensus mark.
As the number of cases is still rising, the pandemic-led demand patterns are likely to stay. In fact, the company continued to see a considerable increase in demand in the retail business in the second quarter of fiscal 2021 (till Oct 1), while demand for foodservice products continued to be lower than the pre-pandemic level in the same time frame. Nonetheless, management expects organic sales growth of 6-8% in the second quarter of fiscal 2021.
Incidentally, shares of the company have gained 6.4% since the earnings release on Oct 1. Further, the stock has rallied 11% in the year-to-date period against the industry’s decline of 1.8%. Apart from this, analysts seem confident of the stock’s future performance as the consensus mark for fiscal 2021 earnings per share has grown 5.4% to $2.52 over the past 30 days. Let’s delve deeper.
Conagra Brands Inc. Price, Consensus and EPS Surprise
Factors Working Well for Conagra
The company has been benefiting from the rising demand amid coronavirus-led stockpiling of essential items and increased at-home consumption. Several other food companies like TreeHouse Foods THS, General Mills GIS and B&G Foods BGS, to name a few, are gaining from such elevated demand trends. Meanwhile, Conagra’s first-quarter fiscal 2021 results were backed by increased organic sales, which in turn benefited from higher at-home consumption amid the pandemic, driving the retail business. Notably, sales grew across Staples, Frozen and Snacks categories. Talking of these categories, the company is on track with a range of innovation and brand-building efforts for exploring growth prospects in these areas.
Even amid the pandemic, the company remained focused on carrying out innovation for its customers as well as consumers. In its first-quarter fiscal 2021 conference call, management stated that its focus on Conagra Way playbook has helped it constantly surpass its target of generating 15% of total retail sales (each year) from products introduced within the past three years. Certainly, the company’s growth is rooted in its innovation platform, which is helping it aid category performance. Apart from this, Conagra has been generating synergies from Pinnacle Foods (acquired in 2018). The company generated total synergies of $219 million from Pinnacle Foods’ buyout, as of the end of the first quarter of 2021.
Foodservice Declines & Cost Concerns
While coronavirus-led increased at-home trends have boosted Conagra’s retail business, the same has been dealing a blow to its Foodservice segment for a while now. Incidentally, quarterly sales in the segment declined 21.8% year over year to $195.1 million due to Sold Businesses and lower organic sales. Organic sales fell 20.3%, with volumes down 24.2% due to reduced restaurant traffic amid the pandemic. Lower sales and elevated input costs also dented the segment’s operating profit, which declined 20%.
Incidentally, the company’s gross margin was adversely impacted by the cost of goods sold (or COGS) inflation to the tune of 220 basis points. Notably, the cost of goods sold inflation was around 3.1% in the quarter. Management highlighted that it spent roughly $34 million as COGS directly associated with COVID-19, which hurt the gross margin by 150 bps in the quarter under review.
Increased demand in the retail business, together with focus on innovation, is likely to help Conagra offset the hurdles and continue driving its growth story. In fact, management reiterated its targets for fiscal 2022 when it reported the first-quarter results. 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 earnings per share (EPS) for fiscal 2022 is likely to be between $2.66 and $2.76. In the second quarter, adjusted operating margin of this Zacks Rank #3 (Hold) company is likely to be 18-18.5%, while adjusted EPS are envisioned between 70 cents and 74 cents.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.