CAG | IN THE BEGINNING

ConAgra Foods (CAG) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.

 

In the note we wrote (CLICK HERE to view) adding CAG to the Best Ideas list, we highlighted some of the key phrases CEO Sean Connelly used at the shareholder meeting last week.  At the time, it occurred to us those phrases were important indications that the changes CAG was embarking on were going to be significant.  Today’s press release was a significant step forward for CAG and Sean did not disappoint on delivering on bold new changes.    

 

SEAN M. CONNOLLY – “Embrace bold change”

 

HEDGEYE - Moving the HQ to Chicago is a BOLD change!

 

SEAN M. CONNOLLY – “More focused company”

 

HEDGEYE – Consolidating the consumer food businesses is a big step forward in the right direction and will allow for greater innovation leading to accelerating growth.

 

SEAN M. CONNOLLY – “The Company also announced the relocation of its headquarters to Chicago, Ill. beginning in the summer of 2016, approximately 700 employees will be located in the new offices in the city’s Merchandise Mart, including the company’s senior leadership team and certain functions of the Consumer Foods business, which are currently located in Omaha, Neb. and Naperville, Ill.

 

HEDGEYE – CAG needed a wakeup call, moving the HQ to Chicago is a bold move to send a message to the workforce that change is underway and the employee’s need to “embrace” the move.  Omaha and Naperville aren’t exactly a hotbed for top tier talent. Being in Chicago will allow them to compete for employees with other top tier companies.  Also, consolidating the consumer food business in Chicago is a clear indication of where the company is headed.  The next logical step is to cut SKU’s and shrink the branded portfolio in order to focus on the core brands. 

   

SEAN M. CONNOLLY –  “Bold action”

 

HEDGEYE – Eliminating 30% of the workforce is a big number and a massive undertaking.

 

SEAN M. CONNOLLY – “The restructuring is expected to result in the elimination of approximately 1,500 positions or approximately 30% of the company’s global office-based workforce.”

 

HEDGEYE – The overarching theme from today’s press release is that CAG will look significantly different in 12-18 months.  We believe that this will also mean significantly improved profitability and increased shareholder returns.

 

SEAN M. CONNOLLY –  “Disciplined and focused”

 

HEDGEYE – As expected, cost cutting takes center stage.

 

SEAN M. CONNOLLY – “Cost savings of approximately $200 million are expected to be derived from a combination of lower headcount and non-headcount costs which will be achieved by aggressively embracing zero-based budgeting, simplifying organizational structure by increasing spans of control and reducing layers, and outsourcing technology and back office functions to improve scalability. Additionally, the company expects to realize approximately $100 million of efficiency benefits from enhancements to trade spend processes and tools.”

 

HEDGEYE – There are some classic buzzwords like zero-based budgeting (ZBB) in this part of the release.  Strangely, we would have been disappointed if they left this part out.  The cost cutting will benefit the numbers in FY2017, which now makes FY16 a rebuilding year.  With one month of 2QFY16 in the record books, we are close to the six month window of opportunity.  We have a tendency to be early with our HIGH CONVICTION TAIL calls in the Consumer Staples space and the six month window is a key metric.  

    

SEAN M. CONNOLLY – “To stay competitive we must change”

 

HEDGEYE – Changes are good and today was not an easy day.

 

SEAN M. CONNOLLY – “We are making difficult, but necessary, decisions to enhance productivity, drive standardization and enhance flexibility to deliver improved profitability. And through our organization redesign, we will better harness the power of our front line by deploying our talent against our largest opportunities for future growth and value creation.”

 

HEDGEYE – Getting behind a company that has been through many restructurings can be challenging.  The world and the environment for food manufacturers is shifting to a new paradigm.  The old guard at CAG embarked on a multi-year process to shift the company to be a dominant private label manufacturer back in 2011 when it failed to acquire Ralcorp.  The company successfully bought Ralcorp in January 2013.  Needless to say that was the beginning of the end to CAG as we once knew it.    

 

SEAN M. CONNOLLY – “Pledged to be transparent”

 

HEDGEYE – The proof is still in the pudding.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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