What's next for ConAgra Foods?

by Monica Watrous
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Sean Connolly, CEO, ConAgra
Sean Connolly, incoming CEO of ConAgra, has his hands full.

OMAHA — When Sean Connolly takes the helm at ConAgra Foods in the coming weeks, he will have his hands full. The incoming CEO and former Hillshire Brands leader joins the company amidst ongoing challenges in ConAgra’s private-label business and headwinds for several of its grocery brands.

For the third quarter ended Feb. 22, ConAgra reported a net loss of $952.7 million, or $2.23 per share on the common stock, which compared with net income of $234.3 million, or 53 cents per share, in the year-ago quarter. Items affecting comparability include pre-tax noncash impairment charges of approximately $1.3 billion, comprising a write down of goodwill and other intangible assets in the Private Brands business. Adjusted diluted earnings per share was 59 cents for the quarter, down from 62 cents in the year-ago period, but higher than previously projected, prompting the company to raise its full-year outlook.

Net sales for the quarter slipped 1.8 percent to $3.88 billion from $3.94 billion the year before.

“Now I imagine many of you have big-picture questions about our strategy and goals,” Connolly told analysts during a March 26 earnings call. “We will get to those over time, but not today. I will need a lot of study to get where I need to be to provide insight on this.

“For now, I will just say that I’m committed to long-term value creation, as is our board of directors,” he added. “My plan is to spend the coming months digging in and learning everything I can about our company. After that, we will share our thinking with all of you at an investor event when the time is right.”

Results in the quarter included an operating loss of $1.27 billion for the Private Brands segment, which compared with profit of $44.7 million in the year-ago quarter, reflecting the impairment charge and a deterioration of the business due to a continued competitive bidding environment and execution shortfalls. Private Brands segment sales in the quarter fell 4.7 percent to $1.01 billion. Volume declined for most major product lines, including pasta, cereal, snacks, condiments and in-store bakery, that more than offset some growth in nutrition bars.

The segment’s comparable profits are expected to improve in fiscal 2016 as ConAgra implements initiatives focused on improving execution and strengthening customer relationships. Specifically, ConAgra’s efforts include narrowing product focus with deep expertise in each business, improving commercialization speed, consistently meeting customer service expectations and expanding margins.

“For us to be seen as a true value-added partner, we have to improve speed, agility and consistency,” said Paul Maass, president of Private Brands and Commercial Foods. “I want to be very clear. We are fundamentally changing the way we operate this business to succeed in the marketplace over time and create stronger results, but we realize this will not be a quick turnaround.”

The Consumer Foods segment posted operating profit of $274.2 million, up 3.4 percent from the year-ago quarter, driven by cost savings and efficiencies, including lower advertising expense, that more than offset inflation. Sales for the segment declined 1.9 percent to $1.83 billion. Brands posting growth for the quarter included Act II, Chef Boyardee, Hebrew National, Pam, PF Chang’s, Rosarita and Slim Jim.

“We are also making progress on the three big brands we’ve been working to stabilize this year,” said Tom McGough, president of Consumer Foods. “Chef Boyardee continues to improve, growing volume year-over-year behind packaging improvements and effective promotion strategies.

“Healthy Choice is growing dollar share in the nutritional meal segment behind our continued focus on building Cafe Steamers…,” he added.

Healthy Choice Cafe Steamer
ConAgra is answering the call for simple ingredients with a new line from the Healthy Choice brand.

 
“Finally, Orville Redenbacher’s is making sequential improvement by getting the fundamentals right, namely simplifying the packaging graphics and improving product assortment on shelves,” he continued. “This is work in process as retailers will be resetting their shelves over the next several months. It is already working in those retailers where we have fully implemented the improvements.”

To lift the segment’s performance, ConAgra has been redirecting resources to faster-growing retail channels such as dollar stores and warehouse clubs, repackaging products in more convenient formats, and addressing consumer demand for simple ingredients. As an example, the company recently introduced Healthy Choice Simply Cafe Steamers, a line of frozen entrees with no artificial ingredients in such varieties as chicken fried rice and meatball marinara.

“The initial end-market performance of these entrees is a great sign of what we can do within this portfolio to resonate better with consumers,” McGough said.

In the Commercial Foods segment, operating profit soared more than 18 percent to $145.2 million, and sales increased 1.4 percent to $1.03 billion for the quarter, reflecting solid domestic results for Lamb Weston potato operations and good efficiencies that more than offset headwinds from a West coast port labor dispute that affected international sales.

Based on third-quarter performance, ConAgra has raised its projections for fiscal 2015 diluted earnings per share to $2.15 to $2.19, adjusted for items affecting comparability. ConAgra continues to expect to reduce debt by approximately $1 billion in the fiscal year and has repaid more than $600 million of debt so far, $500 million of which reflects the utilization of proceeds related to the Ardent Mills transaction.

Connolly began his role as CEO-elect on March 3 and becomes CEO on April 6, replacing Gary Rodkin, who is set to retire at the end of the fiscal year in May.

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