Dive Brief:
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Conagra Brands posted a 2.2% drop in organic net sales for the third quarter ended February 25, led by a 1.3% slide in grocery and snack sales to $838.3 million. Refrigerated and frozen net sales, including Healthy Choice and Banquet, rose 3.2% to $688.5 million. Net income rose to $362.8 million. Revenue beat analyst estimates, rising 0.7% to nearly $2 billion.
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Conagra boosted its outlook for fiscal 2018 to an adjusted earnings per share of between $2.03 and $2.05, which is up from the earlier $1.95 to $2.02 range. The company also expects organic net sales at the higher end of the range of between a 2% drop to unchanged.
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Sean Connolly, Conagra's CEO, said the company's continues to invest in its brands, enhance distribution, and consumer trial "in the face of higher inflation on input and transportation costs, which is pressuring near-term margins." The Chicago-based company's transformation plan "remains squarely on track," he said in a release. "Our efforts are paying off, and our businesses are gaining momentum."
Dive Insight:
Conagra's recent purchase of Sandwich Bros., with its frozen breakfast and entrée flatbread sandwiches, helped increase sales in the refrigerated and frozen category for the third quarter. The company has been revamping some of its best-known products, including its Banquet and Healthy Choice brands, by introducing new items to boost sales. It's also planning to relaunch its Tennessee Pride brand with breakfast and handheld items, popular with millennials, or with anyone who wants an easy meal with protein to start the day.
Conagra's announcement that it's facing higher food costs and a shortage of trucking echoes a similar message from General Mills on Wednesday. In an industry grappling with slowing sales and changing consumer preferences, these challenges are the latest hiccups plaguing companies in the space and a big reason why stocks for many of these businesses have plunged during the past year.
To help reinvigorate sales, companies such as Conagra have been targeting acquisitions, especially in the snacking and better-for-you segments. During the Consumer Analyst Group of New York conference in Florida last month, Connolly said M&A will continue to be a "big part of our strategy."
Conagra's recent acquisition of Angie’s Boomchickapop and its earlier purchase of Thanasi Foods, which makes Duke’s meat snacks and Big Seeds, further solidified the company in the snacking area. The brands were added to the company’s snacks portfolio that already included Slim Jim meat, Chef Boyardee and David Seeds.
The purchase of trendy companies focused on proteins, as well as snacks made with better-for-you ingredients and innovative flavor profiles, is likely to continue as food companies work to position themselves in an increasingly competitive food landscape. Improving their own brands is an important and necessary step, but often buying another firm or brand can quickly grow sales and get a company like Conagra into a new space much faster.
Conagra also has been trimming its portfolio, although not all of these efforts have been successful. The company spun off its $6.9 billion Lamb Weston frozen potato business and dropped its private-label operations. However, its recent attempt to sell off its Wesson oil brand to J.M. Smucker for $285 million ran afoul of government anti-trust regulations because Smucker owns Crisco.
It appears that Connolly is starting to turn things around at Conagra. While the grocery and snacks segment will need further attention, the frozen area with its innovations and makeovers are proving to be a smart area of investment for the company. Similar to other CPG companies in the food and beverage space, Conagra has a tough road ahead, but for now, its desire to focus on deals and new products internally that better position it to meet the needs of consumers seems like the prudent path forward. It can only hope that rising ingredient and transportation costs don't become a long-term problem.