ConAgra private brands recovery slower than expected

ConAgra private brands recovery slower than expected

Private Brands profits were substantially below year-ago amounts, reflecting pricing concessions made last fiscal year, weak volumes resulting from an intense bidding environment and higher commodity costs.

Fiscal 2015 second-quarter highlights:

  • Diluted EPS from continuing operations of $0.05 as reported, due to significant non-cash impairment charges, vs. diluted EPS of $0.48 a year ago. After adjusting for items impacting comparability, comparable diluted EPS of $0.61 this quarter was in line with plans and slightly below year-ago comparable EPS of $0.62.
  • Consumer Foods sales decreased 2 percent, with volume down 1 percent, largely as expected. Key brands are stabilizing as planned. Comparable segment operating profit increased.
  • Commercial Foods sales and comparable operating profit grew as the segment gained domestic share and benefitted from better potato crop quality.
  • Private Brands profits were substantially below year ago amounts, reflecting pricing concessions made last fiscal year which have not yet been lapped, weak volumes resulting from an intense bidding environment, and higher commodity costs.
  • Due to expectations for a continuation of soft volumes and difficult pricing conditions in the near term, the company now expects the recovery in this segment to take longer than originally planned. Fiscal 2015 full year comparable Private Brands segment operating profit is expected to be considerably below comparable fiscal 2014 amounts.
  • In connection with the revised outlook, the company recognized pre-tax impairment charges of approximately $247 million, writing down Private Brands goodwill and other intangible assets; this amount is identified as an item impacting comparability.
  • Based on executional improvements underway, Private Brands profits are expected to demonstrate strong comparable year-over-year growth in fiscal 2016; profit margins are expected to improve gradually thereafter.
  • The company continues to expect full-year diluted EPS to show a mid-single digit rate of growth over the comparable diluted EPS of $2.17 earned in fiscal 2014.
  • The company continues to expect to repay approximately $1 billion of debt this fiscal year, approximately $500 million of which was repaid earlier in the fiscal year; other capital allocation goals are also unchanged.

ConAgra Foods Inc., (NYSE: CAG) one of North America’s leading food companies, reported results for the fiscal 2015 second quarter ended Nov. 23, 2014. Diluted EPS from continuing operations was $0.05 as reported for the fiscal second quarter vs. $0.48 in the year-ago period. After adjusting for items impacting comparability, comparable diluted EPS was $0.61 this quarter and $0.62 in the year-ago period.

Gary Rodkin, ConAgra Foods’ chief executive officer, said, “We are pleased that the fundamentals in our Consumer Foods and Commercial Foods segments are improving. Key retail brands are strengthening, Lamb Weston is gaining domestic share and benefitting from a better quality potato crop, and we are generating COGS and SG&A efficiencies across our operations. EPS came in as planned this quarter; despite challenges in one of our segments, we have reaffirmed our full-year EPS guidance because we expect two of our segments to continue to deliver good performance, and for our whole organization to continue generating strong productivity and efficiencies.”

“Based on current executional challenges, we expect the recovery in the Private Brands segment to take longer than previously expected. Our team is highly focused on opportunities to drive improved execution in this segment over the next several quarters, and we expect these efforts to enable the segment to grow profits in fiscal 2016. We remain confident in the long-term potential for our Private Brands segment given the important role of these products to consumers and trade customers and our ability to utilize our infrastructure to add value for customers.”

Consumer Foods Segment
Branded food items sold worldwide in retail channels

The Consumer Foods segment posted sales of approximately $2 billion and operating profit of $302 million, as reported. Sales declined 2 percent, with volume down 1 percent and price/mix down 1 percent; this was in line with expectations. Foreign exchange did not significantly impact the year-over-year sales comparison.

Brands posting sales growth for the quarter include ACT II, Chef Boyardee, Hebrew National, Marie Callender’s, PAM, Reddi-wip, Slim Jim, Swiss Miss and others. The company notes good performance in alternative channels given the focus on those opportunities this fiscal year.

The packaging, assortment, product, and merchandising initiatives designed to improve the performance of Chef Boyardee, Healthy Choice and Orville Redenbacher’s, are making a positive difference; those brands are expected to continue to improve sequentially over the next several quarters.

Operating profit of $302 million was 6 percent above year-ago amounts as reported. After adjusting for $8 million of net expense in the current quarter and $4 million of net expense in the year-ago period from items impacting comparability, current quarter operating profit of $310 million increased 7 percent over comparable year-ago amounts. The comparable profit growth reflects lower advertising expense in light of stronger promotional support, as well as manageable inflation and good productivity and efficiencies.

Commercial Foods Segment
Specialty potato, seasonings, blends, flavors, and bakery products, as well as consumer branded and private branded packaged food items, sold to foodservice and commercial channels worldwide

Sales for the Commercial Foods segment were $1.1 billion, up 2 percent over year-ago period amounts, and segment operating profit was $148 million, 16 percent above year-ago period amounts, as reported. After adjusting for $9 million of expense in the year-ago period from items impacting comparability, current quarter operating profit increased 8 percent on a comparable basis.

Sales and operating profits for Lamb Weston potato products increased, due to strong performance domestically, a better quality raw potato crop, and good operating efficiencies. Strong domestic performance this year more than offset weaker international sales and profits related to near-term challenges facing quick-serve restaurant customers in key Asian markets. Given the strength of its domestic business, Lamb Weston expects overall profit growth this fiscal year, despite short-term challenges in some international markets and the negative impact of the ongoing longshoremen labor dispute. Profits for the rest of the Commercial Foods segment were in line with year-ago period amounts.

Private Brands
Private brand food items sold in domestic markets

Sales for the Private Brands segment were $1.1 billion in the quarter, down 5 percent from year-ago amounts, driven by 6 percent lower volume. Overall volume declines for major product lines including snacks, cereal, pasta, condiments, and bakery more than offset some progress winning new business and gaining distribution in new accounts, notably in crackers.

The segment posted an operating loss of $202 million, as reported, due to impairing goodwill and other intangible assets. After adjusting for $251 million of net expense from items impacting comparability (approximately $247 million of which were impairment charges) in the current quarter, and $2 million of items impacting comparability in year-ago period amounts, comparable operating profit declined 46 percent. Pricing concessions made last fiscal year but not yet lapped drove a meaningful portion of the comparable profit decline, while lower volumes resulting from an intense bidding environment as well as higher commodity costs also weighed on profitability. Pricing initiatives underway should help pass on the higher commodity costs over time.

Given recent performance and the current outlook, the company expects year-over-year profit improvement for this segment to occur in fiscal 2016 instead of fiscal 2015, and now expects fiscal 2015 comparable operating profits for the Private Brands segment to be below those of fiscal 2014. The outlook reflects expectations for a continuation of an intense bidding environment, heavy discounting by branded manufacturers, and the corresponding negative impacts on volume, price/mix, and profits in the near term. Pricing initiatives are expected to lag input cost increases this fiscal year, which are expected to weigh on fiscal 2015 profitability but benefit fiscal 2016 profitability. The company believes that improved execution will bolster customer relationships, make for a more stable base of business, and strengthen results over time. Initiatives to improve execution and the speed of overall decision-making through simpler and more customer-focused processes, as well as better connectivity throughout the organization, are underway, but are not expected to begin to favorably impact business results until fiscal 2016.

 

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