ConAgra saw decline in consumer volumes accelerate in Q4

ConAgra saw decline in consumer volumes accelerate in Q4

After three profit warnings in a year, it is little wonder the performance of US food giant ConAgra Foods is under scrutiny.

The latest downgrade came yesterday (18 June) when the company behind brands from Healthy Choice frozen meals to Chef Boyardee pasta admitted its earnings per share for its financial year just ended would be "below plan".

The third cut came after a troubled fourth of the quarter of the year, which ran until 25 May. Sales volumes from ConAgra's consumer foods business tumbled 7%, a signal the problems it is seeing in that division deepened during the year.

However, ConAgra's challenges do not stop at reviving growth from its consumer arm. Profits from the group's private-label division during the quarter were, ConAgra said, "weak".

Both factors contributed to ConAgra cutting is EPS guidance for the fourth quarter - thereby hitting its (already twice adjusted) forecast for annual earnings.

There was other worrying news for investors. Notably, ConAgra said its projections for the profits it expects to generate from the private-label arm are now "below original plans for the next several years".

The revised outlook for ConAgra's private-label business, as well as its expectations for "continued profit challenges for some retail brands", primarily Chef Boyardee, resulted in $681m of non-cash impairment charges for the fourth quarter.

In February, after ConAgra's second profit warning, CEO Gary Rodkin took to the stage at the annual CAGNY investment conference in Florida to front up about the company's problems and to try to demonstrate how to rectify them.

Rodkin admitted ConAgra had made mistakes with some of its core brands. He acknowledged demand for private label in the US had flattened out. However, he remained confident ConAgra could breathe fresh life into its consumer brands and he was bullish about the long-term prospects for own label, a sector in which the company made a significant - and confident - move in 2012 with the acquisition of Ralcorp Holdings.

In a sense, it would be a bit much to ask for ConAgra to be firing on all cylinders just three months down the line. And, of course, the subdued grocery environment will be having an impact on the business. However, yesterday's announcement has perhaps brought home to the market just how much work ConAgra needs to do to get both sides of the company back up to somewhere approaching full speed.

Shares in ConAgra closed down over 7% yesterday, with some on Wall Street arguing much of the company's problems are less to do with trading conditions and more based on internal factors.

"It is difficult, in our view, to read these results from ConAgra across to other food companies. ConAgra's consumer foods business has been weak and performing well below its categories, categories themselves that are underperforming too," Stifel Nicolaus analyst Chris Growe said. "We see little to lift this sales performance – marketing spending has been down strongly this year, new product activity has been lacklustre, and certain key categories remain very challenged.

"In addition, the weakness in the company's private brands division is not necessarily indicative of the trends in private label overall. It is clear that ConAgra is struggling to manage this business and while it believes in the long-term opportunity in Ralcorp, the next 12 months at least will remain a very difficult period for the business with some hope that the synergies from the acquisition contribute to operating profit stability at some point in the coming year."

ConAgra and Rodkin will report to the market in more depth next week, when its full annual results are published.

Expect analysts and investors to want to hear about the specific efforts ConAgra is making to eke out growth from its consumer foods business and more detail on the outlook for its private-label arm.

ConAgra was confident about the impact the Ralcorp deal could have on its business and is still upbeat about the potential for own label in the US. However, the company appears to be finding it a challenge integrating the Ralcorp business, while private-label rivals like TreeHouse Foods are enjoying higher sales.