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Conagra (CAG) Troubled by Escalated Costs & Divestitures

Conagra Brands (CAG) expects cost inflation of 9% in fiscal 2022. The company is also seeing tough comparisons with the year-ago period's initial pand...

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Conagra Brands, Inc. CAG appears to be troubled by escalated cost concerns. Apart from this, the company’s sales are seeing tough comparisons with the year-ago period’s initial demand spike due to the pandemic and impact from divestitures. These factors dented Conagra’s fourth-quarter fiscal 2021 results, with management curtailing its guidance for the fiscal year.



The Zacks Consensus Estimate for fiscal 2021 bottom line has moved south from $2.63 to $2.47 per share over the past 60 days. Shares of the Zacks Rank #4 (Sell) company have declined 12.1% in the past three months compared with the industry’s 8.4% fall.

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CONAGRA BRANDS Price, Consensus and EPS Surprise



CONAGRA BRANDS Price, Consensus and EPS Surprise

CONAGRA BRANDS price-consensus-eps-surprise-chart | CONAGRA BRANDS Quote

Factors Weighing on Conagra

Lately, Conagra has been encountering cost of goods sold inflation. For the fourth quarter of fiscal 2021, adjusted gross profit declined 22.4% year over year to $721 million and adjusted gross margin contracted 194 basis points to 26.3%. The downside was a result of a decline in net sales, cost of goods sold inflation, lost profits related to Sold businesses and comparisons with the year-ago period’s additional week. We note that the divestitures of the H.K. Anderson business, Peter Pan peanut butter business and Egg Beaters business are collectively referred to as Sold Businesses. Adjusted EBITDA for the fiscal fourth quarter declined 24.6% from a year ago to $520 million due to lower adjusted gross profit.



Management expects cost inflation of 9% in fiscal 2022. Although management is focused on undertaking relevant saving and pricing efforts to combat this inflation, the timing and gains from these initiatives are likely to be more skewed toward the second half of fiscal 2022. These actions are unlikely to completely offset input cost woes in fiscal 2022. First-quarter fiscal 2022, in fact, is likely to be the lowest-margin quarter for the fiscal year. Apart from this, Conagra’s brand-building investments may also impact margins.



Talking of Sold businesses, Conagra’s net sales growth was affected by the same in fourth-quarter fiscal 2021. In fact, the Egg Beaters divestiture (concluded on May 27) is likely to reduce annual reported net sales by $40 million and adjusted EPS by 1 cent. The Egg Beaters liquid egg business mainly formed part of the company’s Refrigerated & Frozen segment.

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FYQ4 Results & FY22 View Bear the Brunt

For fourth-quarter fiscal 2021, both the top and bottom lines fell year over year. Sales in most segments were hurt by tough comparisons with the year-ago period’s initial demand surge. The impact of an additional week last year and divestitures also affected results. Adjusted earnings of 54 cents tumbled 29.1% year over year, mainly accountable to a lower gross profit. Net sales of $2,739.5 million also declined 16.7% year over year. Apart from these, reduced organic sales were a major factor that dragged down fiscal fourth-quarter revenues. Organic sales fell 10.1% due to lower volumes, which dropped 12.8% due to tough comparisons with the year-ago period’s initial spike in at-home food consumption stemming from the pandemic outbreak. This weighed on all segments, apart from Foodservice.



On fiscal fourth-quarter earnings call, management lowered its guidance for fiscal 2022. Organic net sales are anticipated to be flat year over year. Organic sales are likely to be higher in the second half than the first half of the fiscal year. Management stated that it expects children to get back to in-person school and more workers to return to offices in the fall. That said, the company expects the pandemic-led volume gains to gradually slow down at the end of first-quarter fiscal 2022.



Adjusted operating margin for fiscal 2022 is anticipated to be 16% and adjusted EPS is projected at $2.50. Prior to this, during the third-quarter fiscal 2021 earnings release, management guided for organic net sales growth of 1-2% (three-year CAGR ending fiscal 2022). Adjusted operating margin was expected in the range of 18-19%, and adjusted EPS was envisioned between $2.63 and $2.73. Increased cost inflation prompted management to lower its guidance for fiscal 2022.

Wrapping Up

Conagra is seeing recovery in the Foodservice business, as restaurant traffic is picking up with the lifting of the pandemic-led curbs and people venturing out. Management is focused on pricing and saving efforts, while the timing and gains from these initiatives are likely to be more skewed toward second-half fiscal 2022. Despite these upsides and the company’s brand strength, the near-term headwinds cannot be ignored.

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