ConAgra Gives Up on Private-Label Food Business

It’s been a very tough year for ConAgra Foods (NYSE: CAG), but you wouldn’t know it judging by the stock price. Shares of the packaged, shelf-stable food company are up 48% over the past year, which is an amazing outperformance, considering that the company’s sales and profit are not growing.
Shares of ConAgra are up in large part because of activist investor Jana Partners, which recently announced a significant 7% stake in the company. Jana is pressuring ConAgra to make changes, and it looks like Jana is going to get its wish. According to media reports, ConAgra will sell Ralcorp Holdings, its private-label food business.
Now that the activist investors got what they were hoping for, it might seem like there is nothing standing in ConAgra’s way anymore. But there are still core fundamental problems with ConAgra pertaining to its key brands.

ConAgra’s Mea Culpa

ConAgra sought to diversify its business by branching out into private-label goods. It accomplished this by buying Ralcorp Holdings in 2011, but the deal didn’t come cheap. ConAgra initially offered $65 per share for Ralcorp, but then had to increase its offer by 38% to $90 per share.
Things quickly unraveled from there. When ConAgra made the deal, not only was it counting on instant revenue growth, but it was also banking on significant cost synergies that would make the acquisition highly accretive to earnings.
Unfortunately, this has not happened. ConAgra was unable to eliminate the duplicative costs like it had planned. Moreover, Ralcorp’s competitive position was rapidly weakening, and ConAgra had to make significant pricing concessions to keep business.
This was disastrous, and resulted in huge impairment charges taken against earnings. In the last fiscal year, ConAgra’s impairment charges totaled $681 million. Just last quarter, ConAgra wrote down $1.3 billion of goodwill in its private-label business. Since the takeover, ConAgra has absorbed $2 billion in write-downs, and will now sell the business.
Analysts estimate ConAgra could fetch around $3.7 billion for Ralcorp, which would be a very bitter pill for shareholders to swallow. ConAgra management simply overpaid for Ralcorp, suffered significant losses, and is now selling the business for much less than it paid.
If that weren’t bad enough, the decision to sell Ralcorp still doesn’t solve some deeper, more fundamental problems arising in ConAgra’s core brands.

Don’t Ignore the Consumer Shift

There has been an undeniable shift in consumers’ purchasing habits over the past year or two in the United States. Shoppers at the grocery store, particularly younger people, are increasingly opting for fresher foods with better ingredients, such as organics, and are turning away from packaged, shelf-stable and frozen foods.
This is a problem for ConAgra, because aside from its poorly-performing private-label food business, its core brands – Healthy Choice, Chef Boyardee and Orville Redenbacher’s – are squarely in the cross hairs of the changing consumer trends.
In fiscal 2014, sales in ConAgra’s consumer foods unit fell 3%, driven largely by weakness in those three flagship brands. These three brands are very significant for ConAgra, because they collectively account for more than $1 billion in annual sales and comprise a significant portion of ConAgra’s consumer foods segment, which makes up 47% of its total revenue. Over the first three quarters of the current fiscal year, ConAgra’s consumer foods sales declined 1.6% year-over-year.
To be sure, ConAgra selling its private-label food business and cutting its losses on what amounted to a very poor decision is probably the right thing to do. But to give ConAgra the all clear seems premature. It’s still seeing deterioration in the three brands that matter most to the company. Until it solves those problems, ConAgra’s huge stock price gains do not seem justified.

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