Conagra's (CAG) Brand-Building Efforts Aid Amid Volume Concerns

Zacks Equity Research
·4-min read

Conagra Brands, Inc. CAG continues to be driven by its focus on brand-building through innovation, merchandising and advertising. The company has been witnessing market share gains in the frozen category. In the third quarter of fiscal 2023, the frozen business remained strong despite a challenging landscape. This reflects the forte of the company’s brands and the effective execution of the Conagra Way playbook.

These upsides bode well for this Zacks Rank #3 (Hold) company amid elevated costs related to growth-oriented investments and an industry-wide slowdown in consumption. Let’s delve deeper.

Brand-Building – A Key Driver

The consolidation of Conagra Brands and Pinnacle Foods (acquired in October 2018) has helped create a robust portfolio of leading, iconic and on-trend brands. In addition to this, prudent innovations have been helping the company modernize its portfolio and meet consumers’ changing needs aptly.

Conagra maintains its focus on investing in innovation, considering it the primary asset in its strategic approach and essential for enhancing its brands and fostering growth. These actions, focused on re-engaging consumers with existing products and introducing them to new innovations, give the company confidence in driving momentum through multifaceted brand-building investments.

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Strong Frozen Business

Conagra has been seeing market share gains in the frozen category. The company experienced a 1-point unit share gain in the third quarter despite a challenging landscape. On a volume basis, Conagra’s frozen business outperformed the market. The company has made several investments in the innovation of key brands of the frozen business, which are yielding a favorable response. During the third quarter, the company saw improvements in frozen sides, frozen breakfasts, frozen seafood and frozen single-serve meals.

International Unit Looks Good

In the third quarter of fiscal 2024, Conagra continued to deliver momentum in the International business. Net sales advanced 4.6% year over year to $272 million, reflecting improved organic net sales (up 1%) and positive currency effects (3.6%). Organic sales growth was driven by volumes, which rose 2.7% due to strength in the Mexico and Global Export businesses. Conagra’s Mexico business has been witnessing volume growth for several quarters now. The continuation of these trends bodes well.

Boulders Ahead

Conagra has been seeing soft volumes for a while now. In the third quarter of fiscal 2024, volumes dropped 1.8% year over year, hurting the company’s organic sales, which fell 2%. The downside was a result of the continuation of the industry-wide slowdown in consumption and the recent changes in consumer behavior. Industry-wide macroeconomic challenges have adversely impacted consumer purchasing patterns. For fiscal 2024, organic net sales are anticipated to decrease by 1-2%.

Conagra has been encountering cost inflation for a while now, though the trend has been moderating of late. In the third quarter of fiscal 2024, the adjusted gross margin was partly affected by the inflated cost of goods sold, soft organic sales and adverse operating leverage. During the third quarter, A&P went up 6.5% due to elevated advertising spend on Birds Eye and Healthy Choice brands. Strategic initiatives across innovation, merchandising and advertising give out positive signals for long-term growth, albeit with short-term margin considerations.

For fiscal 2024, management envisions an adjusted EPS in the band of $2.60-$2.65 compared with an adjusted EPS of $2.77 reported in fiscal 2023. Shares of CAG have dropped 1.4% in the past three months compared with the industry’s decline of 6.4%.

3 Appetizing Bets

Vital Farms Inc. VITL offers a range of produced pasture-raised foods. It currently sports a Zacks Rank #1 (Strong Buy). VITL has a trailing four-quarter average earnings surprise of 102.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Vital Farms’ current financial-year sales and earnings indicates growth of 22.5% and 59.3%, respectively, from the year-ago reported numbers.

Utz Brands Inc. UTZ, which manufactures a diverse range of salty snacks, currently carries a Zacks Rank #2 (Buy). UTZ has a trailing four-quarter earnings surprise of 2%, on average.

The consensus estimate for Utz Brands’ current financial-year earnings indicates growth of 26.3% from the year-ago reported numbers.

Ingredion Incorporated INGR, which manufactures and sells sweeteners, starches, nutrition ingredients and biomaterial solutions, currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for INGR’s current fiscal-year earnings indicates growth of 3.6% from the year-ago reported figure.

Ingredion Incorporated has a trailing three-quarter earnings surprise of 10.1%, on average.

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Conagra Brands (CAG) : Free Stock Analysis Report

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