CHICAGO — ConAgra Foods continues to execute its strategy of expanding margins by moving away from value-priced brands and growing its portfolio of items that offer a benefit beyond value. Yet the company continues to lag behind the margins attained by its consumer packaged goods peers.
|Sean Connolly, c.e.o. of ConAgra Foods|
“ … if you look at our branded businesses in the U.S., as an example, you’ve seen margin improvement of about 700 basis points versus the same quarter two years ago,” said Sean Connolly, chief executive officer of ConAgra Foods, in a Sept. 29 conference call with financial analysts to discuss first-quarter earnings. “So, clearly we believe and we’ve demonstrated that we can do the things necessary to expand those margins. And by no means do we think our work is done. We will continue to chip away at that and we’ll do it using a number of different factors.”
One example Mr. Connolly cited is how ConAgra Foods has approached its PAM cooking oil business since he took over.
“ … There was a period of time in our past where our PAM business was heavily promoted and the only trick in the book that we turned to was dealing,” he said. “But if you look at consumer trends in oil over the last few years, you see that the oils have changed. It’s moved to things like olive oils, things like coconut oil.
“So, instead of competing on PAM on price attributes we’ve evolved the PAM business. We’ve got olive oil PAM, we’ve got coconut oil PAM. These are relevant, modern day attributes that change the discussion with the consumer to be about something that they value and they will pay more for, and not about deep discounting.”
The strategic efforts ConAgra has employed led to higher earnings during the quarter, but lower sales. During the quarter ended Aug. 28, the company recorded net income of $182.6 million, equal to 42c per share on the common stock, and an improvement compared with the same time during the previous year when the company recorded a loss of $1,154.1 million. The loss primarily was attributed to an impairment charge against the company’s Private Brands business, which eventually was sold to TreeHouse Foods.
Sales for the quarter fell 5% to $2,667.5 million from $2,794.9 million the previous year.
“At a high level, we saw strong results from both Lamb Weston and our branded consumer businesses,” Mr. Connolly said. “On Lamb we once again saw what a terrific business this is. Sales were up, margins were up and profit was up.
“On our branded consumer businesses, we also made terrific progress. Here, we are seeing clear evidence that our strategy to upgrade our revenue base and expand margin is working.”
Mr. Connolly added that the volume declines the company experienced during the quarter primarily were related to brands that have historically targeted the price-focused consumer and relied heavily on deep discounting and promotion to drive volume.
“In fact, if you dig into the scanner data, you will see that more than 80% of our Q1 volume declines can be attributed to just six brands that have historically been under-priced and over-promoted,” he said. “We are confident that our actions represent the right way to maximize the value of our branded portfolio over time.
“As a supporting data point, gross margins on our U.S. retail brands are up about 700 basis points since Q1 two years ago. As we continue to execute this strategy, we believe our revenue base will be better positioned to deliver stronger, more consistent performance over the long term.”
Mr. Connolly also provided an update on the planned spin-off of ConAgra’s Lamb Weston business. Both companies, ConAgra Brands and Lamb Weston, will hold separate investor days in October. The Lamb Weston event is scheduled for Oct. 13 and ConAgra Brands will hold its event a week later on Oct. 18.“Our teams are hard at work preparing for these meetings and we are excited about the opportunity to take you through a deeper dive on these businesses and why we believe they will create significant value for investors as separate, pure-play public companies,” Mr. Connolly said. “Each company will share more details, including financial outlooks and capital allocation priorities at these events. We are confident you will see the unique opportunities available to both companies and why each is well positioned to seize them.”