ConAgra Foods Earnings: A Shifting Market and Elevated Costs Combine to Weigh on Results

ConAgra Foods owns many popular, well-known brands, including Healthy Choice, Chef Boyardee, and Orville Redenbacher's. Unfortunately, those three core brands aren't as popular as they used to be. Consumer preferences are starting to shift away from packaged foods and toward fresher alternatives. This trend is having a significant impact on ConAgra's three core consumer foods brands. In turn, these market forces are weighing on the company's bottom line.

In addition, a major acquisition that ConAgra pursued to boost its presence in private-label brands is proving more costly than originally anticipated.

Combined, ConAgra's sluggish sales and bloated cost structure are negatively affecting earnings. Here's what you need to know from ConAgra's most recent earnings report.

First, the details

Last quarter, total sales and diluted earnings per share fell by 2% and 8%, respectively, year over year. For the full fiscal year, net income declined to $315 million, representing a whopping 60% decline versus fiscal 2013. These results badly missed estimates and were very poor when compared with those put forth by competitors such as Nestle , whose Lean Cuisine brand is a direct competitor of ConAgra's Healthy Choice.

Over the first half of the year, Nestle has produced solid 4.7% organic sales growth, and 3% growth in earnings per share after excluding currency translation effects.

For the full year, Nestle expects 5% organic sales growth and improving margins. The main reason for its outperformance is that Nestle holds a highly diversified company. In all, Nestle holds more than 2,000 brands, and it offers them in more than 80 countries.

From a sales perspective, poor performance in ConAgra's three key brands is posing a big problem. Collectively, the Healthy Choice, Chef Boyardee, and Orville Redenbacher's brands were specifically cited by management as the biggest reasons the company's consumer-foods segment posted a 7% drop in sales.

Adding to the uncertainty was that even though management vowed to improve the company's cost structure, expectations for the upcoming fiscal year are modest. Management expects only "mid-single digit" growth in earnings per share.

Several cracks appearing in ConAgra's armor

Not only is ConAgra suffering from falling sales in its key brands, but its expenses are also soaring as a result of a poorly executed acquisition. ConAgra acquired Ralcorp Holdings last year for $5 billion, which it hoped would boost sales in its private-label brands. Unfortunately, the acquisition isn't proceeding nearly as smoothly as management had hoped. Integration costs are coming in much higher than expected. As a result, ConAgra's private-brands segment posted a $573 million loss last quarter because of impairment charges.

Going forward, management pledges to reduce costs. In the upcoming year, management expects to generate $350 million-$375 million in cost savings. This will be achieved primarily through productivity gains and cost synergies from its integration of Ralcorp.

In addition, the company is determined to repay debt to shore up its balance sheet. This is a good move, since at the end of its most recent fiscal year, the company held more than $8.6 billion in senior long-term debt. ConAgra also has $2.6 billion in what it terms "other non-current liabilities," compared to just $5.3 billion in stockholder equity.

Repaying this debt will use a lot of cash flow. Management expects to generate $1.6 billion to $1.7 billion in operating cash flow in FY 15, only a slight increase from the previous year. Still, ConAgra says it will repay approximately $1 billion of debt in FY 15.

ConAgra is suffering from a shifting market, and that shift is affecting its three key brands. In addition, it needs to repay debt resulting from its major acquisition. Investors will want to keep a close eye on the company's next quarterly report.

Top dividend stocks for the next decade

The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now .

The article ConAgra Foods Earnings: A Shifting Market and Elevated Costs Combine to Weigh on Results originally appeared on

Bob Ciura and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More