Conagra Brands transformation on track
July 6, 2017
by Keith Nunes
Conagra has added on-trend brands such as Blake's, Frontera, Duke's and BIGS through acquisitions.
CHICAGO – Fans of the National Basketball Association’s Philadelphia 76ers understand that “the process,” an initiative that requires undergoing negative results in order to build a winning team, takes time. Conagra Brands is in the midst of its own process and on track to emerge as a pure play, branded consumer packaged goods company, according to management.
|Sean Connolly, president and CEO of Conagra Brands
“As I told you two years ago, we are committed to moving with agility, but transforming Conagra is a multiyear effort, not a flip of the switch,” said Sean Connolly, president and CEO, during a June 29 conference call to discuss the company’s fiscal 2017 results. “We've reshaped our company and our portfolio, exiting private brands, as well as noncore businesses, like Spicetec and JM Swank. Soon, we expect to add Wesson to that list. We flawlessly executed the Lamb Weston spin.
“We’ve also added on-trend brands through modernizing acquisitions, like Blake’s, Frontera, Duke’s and BIGS. At the same time, we’ve overhauled our culture, growth capabilities and margins behind a new management team and an energized new corporate headquarters. This went hand-in-hand with aggressive actions to reduce costs, upgrade the quality of our revenue base and jumpstart innovation across the company. Clearly, we’ve been busy, but our work is not finished.”
During the fiscal year ended May 28, Conagra Brands earned $648 million, equal to $1.46 per share on the common stock, and an improvement compared to the previous fiscal year when the company recorded a loss of $677 million.
Sales for the year fell 10 percent to $7,826.9 million from $8,664.1 million in fiscal 2016. Much of the sales decline was related to the divestment of noncore businesses.
“Now that we’ve undone some legacy practices that inflated our volume base and have rebuilt our innovation capabilities, we are positioned to improve growth trends sequentially,” Connolly said. “In fiscal ‘18, we will continue our progress to bend the top-line trend. We expect to further accelerate growth in the future as our innovation pipeline and new marketing programs take hold in the marketplace. Meanwhile, margin expansion has been and always will be a way of life at Conagra Brands …”
In June 2016, Conagra entered into a definitive agreement to sell its JM Swank business.
He added that as the company enters fiscal 2018, it is working from a stronger base.
“There’s a healthier business emerging, one that is less promotional, with a greater percentage of volume coming from loyal households and at a higher margin,” Connolly said. “This allows us to invest in renovation and innovation, and ultimately leads to sustainable growth.”
As an example of this process, Connolly referenced Conagra’s Healthy Choice brand. As the consumer’s perception of health and wellness has evolved beyond physical well-being to simple labeling, protein and convenience, the company has transitioned the brand.
“We saw an opportunity to innovate and differentiate the Healthy Choice brand to respond to these consumer needs by entering premium segments, adding modern product attributes, upgrading product quality and developing contemporary ethnic cuisines,” he said. “Leading this transformation has been the Healthy Choice Cafe Steamers platform, which today makes up over 80 percent of the brand’s net sales.
“The Healthy Choice transformation demonstrates that a legacy brand can attract younger households. In just the last 26 weeks of fiscal 2017, brand volume from millennials is up 17 percent. IRI (Information Resources Inc.) total dollar sales are up 2.2 percent despite a 21 percent reduction in incremental sales, which is consistent with our focus on value over volume. Base dollar sales are even stronger, up 9 percent over the latest 26 weeks and 12 percent over the latest 13 weeks, with base velocities up 11 percent and 4 percent over the latest 26 and latest 13 weeks, respectively, and perhaps, my favorite part of this case study is the margin story. Overall, our Healthy Choice frozen business has grown margins by more than 900 basis points since fiscal 2014, as we began to price to value and removed unprofitable promotions.”
In fiscal 2018, Conagra Brands expects its reported net sales growth to be in the range of down 2 percent or flat. Earnings from continuing operations are expected to be in the range of $1.84 to $1.89.
The Healthy Choice Cafe Steamers platform makes up over 80 percent of the brand's net sales.
“We expect adjusted operating margin in the range of 15.9 percent to 16.3 percent for fiscal 2018, as we continue to strengthen our portfolio and invest in product innovation,” said Davis S. Marberger, CFO. “We expect net sales and EPS performance for fiscal 2018 to be weighted toward the second half of the fiscal year. We expect net sales growth to improve each quarter as new products build distribution with customers and trial with consumers. Also, cost savings from realized productivity is weighted toward the second half due to the timing of projects.”
Connolly said Conagra Brands will continue to “chip away” at its margin opportunity while delivering profitable growth.
“Finally, we expect to find additional opportunities to reshape our portfolio,” he said. “Clearly, this includes continuing to enhance our current portfolio through a disciplined approach to M&A, but it may also include exiting brands that no longer fit, and are more highly valued by others in an efficient manner and leveraging our tax asset. We still have work to do, but we're on track as we execute against our plan. We're confident in the strategy we have in motion is the right one to sustain improved consistency in our performance and profitability, while delivering long-term shareholder value.”