CAG keeps its outlook modest, but momentum suggests better
Conagra reported Q4 EPS of $.75, above consensus of $.66. Organic revenue growth was 21.5% in the quarter. Grocery & Snacks organic growth was 40.4%, led by retail popcorn sales up 42.2% and Chef Boyardee retail sales up 62.4%. Sunflower seeds were down 13.7% from the lack of a baseball season. Refrigerated & Frozen organic growth was 17.6%. Management said that frozen sales were held back by available capacity during the quarter but still delivered robust results in each category, as seen in the following chart. Frozen represents ~40% of Conagra’s business, but 100% of Nomad Foods (Hedgeye Best Idea Long).
Foodservice declined 31.5%, better than management expected due to restaurant takeout and delivery sales. Gross margins expanded 110bps with COGS inflation of 170bps. Operating margins expanded 390bps.
Management guided Q1 EPS to $.54-.59 vs. consensus of $.54. Organic net sales are expected to grow 10-13%. Operating margins are still expected to be between 18-19%. Management said they expected retail and foodservice demand to trend toward historical norms as the year progresses. Management maintained its long term F2022 targets for sales, margins, and EPS of $2.66-2.76. Leverage has been reduced to 4.0x at the end of the quarter.
A pandemic driven boost to sales will make a lot of KPIs look much better, including sales growth, margins, and cash flow. Share gains, keeping new consumers, relationships with your retailers, and reinvestments in the business will determine which companies can build upon 2020. Conagra looks like it will deliver more than it promises.
New stores and brands win during the pandemic trial period
Advantage Solutions, a business solutions provider for retailers, recently published its survey results that said six in ten shoppers opted to try an alternative to their primary food retailer (including online options) during the pandemic. Magid, a brand research consultancy, found in its consumer survey that 28% of consumers have continued to shop at new food retailers in May, down slightly from 30% in April. Out of stocks fell from 46% earlier in the pandemic to 32% as the cause of switching retailers. Other reasons given by shoppers for shopping elsewhere included one-stop shopping (27%), convenient location (23%), and lower prices (17%).
Out of stocks and a change in retail locations caused 55% of shoppers to purchase other brands during the pandemic. Magid reported that 78% of consumers who have tried new brands during the pandemic are continuing to buy them even when their preferred brand is available. Conagra said yesterday that the repeat purchase rate for consumers whose first trial of a Conagra brand in March was 28%. The repeat rate increased to 37% in the four weeks ended April 19 and to 38% in the four weeks ended May 17. 60% of consumers said they would continue to purchase new private label brands after the pandemic ends. The categories with the most switching to private label Magid found are baby food (80%), snack bars (78%), spices (76%), dry goods (74%), and vitamins (74%).
The pandemic has caused several changes in consumers’ food shopping behaviors. Please join us for our Grocery Black Book Part 2 on Thursday at 10 AM when we will dig into those changes. Consumer Staples Subscribers: CLICK HERE for event details (includes video link, materials link, and dial-in).
USMCA begins, will it lead to higher food prices?
The United States Mexico Canada Agreement goes into force tomorrow, July 1. The deal is designed to improve and increase the trade flow between the three countries and raise the content that must be made or sourced in North America to achieve zero-tariff levels. There are also rules governing e-commerce and digital business that was not addressed under NAFTA. The US agriculture industry is expected to see a $2B increase in exports. Canada will increase quotas on US dairy products with a projected $242M benefit. Canada will treat wheat imports the same as domestic for grading purposes while Mexico has agreed that all grading standards for ag products will be non-discriminatory. US beer exports to Mexico are expected to improve modestly. US poultry and egg producers will see expanded access to Canada. The impact appears to be modest in a $140B US agricultural export market.
