HEDGEYE OPINION
ConAgra Foods reported mixed 1Q17 results today, with overall revenue falling 5% (declined in all of the company’s units), but adjusted EPS of $0.61, beating consensus EPS of $0.48. Management attributed the 5% decline to an increased focus on profitable volume, foreign exchange, and divestitures. Despite having it on our Long Bench, we continue to champion CAG as a great long term investment, due to the repositioning of its portfolio and its continued focus on brand expansion and outreach, as shown by their recent purchase of Frontera Foods (we would also note the low leverage profile for ConAgra Brands post-spin).
We see the light at the end of the tunnel, and clearly by todays stock action so do investors. The concerns around their margin profile being considerably below the large cap food comps are reasonable but they are putting mechanisms in place that will allow them to close the gap further over time. Their work on the Banquet brand gives us great confidence that if they can pivot that brand to more profitable growth, they will be able to do the same to their broader portfolio.
The Lamb Weston business continues to perform well with sales up 4%, which is impressive considering many consumers have fallen out of love with many big legacy processed food brands. In addition, CAG is still on track to execute the Lamb Weston spin-off this fall. Management also touched on their game plan for continued growth, called their “5 Portfolio Management Principles”, promising to expound upon this at their Investor Day.
NOTABLE COMPANY THOUGHTS
- According to management, the majority of the declines were in brands that were underpriced and over promoted
- Will complete Lamb-Weston spinoff during the Fall
- Saw strong results from Lamb Weston and branded consumer business
— Sales, margins, and overall profits were up
- Remain focused on positioning US branded portfolio for long term success
- Management mentioned that in the past, they had been overly-reliant on deep discounts, which lead to under leveraging some of their greatest assets and limited their ability to drive higher margins
- Will be moving away from focusing and deep-discount pricing and aggressive promotions…”We will be supporting value of volume, instead of volume over value.”
- Have created a game plan for moving toward continued growth (5 Portfolio Management Principles); will do a deep dive on each at Investor Day in October
- Regarding the scheduled spin-off, the following segments will comprise the ConAgra Brands: Grocery & Snacks, Refrigerated & Frozen, International and Foodservice
- The Commercial segment will fall under the Lamb Weston flag.
- Lamb Weston had a strong quarter, with net sales up 4%, and the company continues to see opportunities to drive strong growth in the Lamb Weston business
- Named David Marberger as new EVP & CFO. Marberger brings more than 30 years if finance and leadership experience to ConAgra Foods, including significant consumer packaged goods expertise.
QUICK COMP
- Revenue $2.67B (down 5% YoY) vs FactSet $2.73B
- Adjusted diluted Q1 EPS of $0.61, beating Factset estimate of $0.48
— Continued margin expansion, lower SG&A expenses
- Grocery & Snacks
— Sales (5.4%) to $757.2M, compared to a year go
- Volume (6%)
- Price/mix +1%
— Operating profit +30.7% to $185.4M
- Refrigerated & Frozen
— Sales (8.1%) to $604.6M, compared to a year go
- Volume (11%)
- Price/mix +3%
— Operating profit +14.1% to $97.2M
- International
— Sales (5.7%) to $194.7M, compared to a year go
- Volume (2%)
- Price/mix higher
— Operating profit (12.0%) to $14.6M
- Foodservice
— Sales (1.0%) to $268.0M, compared to a year go
— Operating profit (10.3%) to $23.5M
- Commercial
— Sales (2.0%) to $843.0M, compared to a year go
— Operating profit +32.6% to $148.2M
- Adjusted gross margin 27.3% vs year-ago 25.3%
- Repurchased 1.8M shares at a cost of $86M
FY2017 GUIDANCE
- The Lamb Weston spin-off remains on track for the fall, and will result in two independent, publicly traded, pure play companies, ConAgra Brands and Lamb Weston
- Further guidance will be provided at the Investor Day in October
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
