EUR 850.00 For Business Accounts Only

Morningstar | Conagra's Focus on Innovation Should Revitalize Its Top Line and Strengthen Its Margin Trajectory

We think Conagra's portfolio of brands spanning the meal (Banquet, Marie Callender’s), enhancer (Hunt’s, Reddi-wip), and snack (Slim Jim, Orville Redenbacher’s) categories has helped the company develop a competitive edge. Over the past few years, the firm has focused its portfolio on branded fare, including selling its private-label and commercial operations, but we believe categorywide headwinds and heightened competition in the center of the store could eat into its brand intangible asset over time. Conagra’s efforts to take pricing and limit discounting reflect the challenges inherent to premiumizing offerings in its categories; for example, volume in the refrigerated and frozen segment fell at a high-single-digit clip in 2016 and 2017, at a time when price/mix averaged 250 basis points of improvement. However, we contend the firm's refocused investments in its brands (in the form of product innovation and marketing) should support its efforts to refresh core offerings and bring more premium fare to market. In this context, management estimates that the percentage of its fare sold on promotion decreased around 6% between 2015 and 2018.We think the acquisition of Pinnacle Foods will complement Conagra's brand set, as the combined entity will hold the number-two spot in the domestic frozen food aisle, but we don't expect it to materially enhance the firm's competitive edge. We believe the difficulties in creating differentiated products, declining center-store traffic, and competitive pressures have led to challenging category dynamics that could prove difficult to overcome if products fail to adapt to evolving consumer trends (as highlighted in second-quarter results, when lackluster innovation led to eroding sales and distribution for key brands like Birds Eye and Wish-Bone). Despite this challenge, Conagra is still targeting $285 million in cost synergies from this deal (above its initial estimate of $215 million) by fiscal 2022, which we find achievable. These savings should allow the firm to balance margin expansion with investments in marketing and research and development, ensuring that its brand set remains responsive to consumer tastes.