CAG Must Give Back Price Increases

For Thomas's preview heading into the ConAgra conference call, please click here.

ConAgra (CAG - commentary - Cramer's Take) reported EPS from continuing operations of 43 cents, 30% over last year's 30 cents and vs. a 38-cent average Street estimate.

Consumer food sales rose 4.4% on price increases to cover higher commodities costs. Units were down 4%, showing that price increases and higher private-label sales are starting to hurt, in my opinion. Comparable operating profit was off 8%. Non-measured channels are performing very well.

North American grocery sales increased 2% and had a 7% profit contribution margin decline. (A profit contribution margin is a gross margin less advertising and promotional expense. I would rather see operating profit, but promotions are much bigger than advertising at ConAgra, so it is worthwhile info.) Frozen sales increased 1% but had a 23% increase in contribution dollars in spite of significant profit problems at Banquet as Nestle promotes hard.

Snacks and store brands sales rose 8%, with a 12% contribution dollar increase. (ConAgra's private-label snack bars are increasing share in this branded category.) Enabler Brands sales increased 11%, and contribution declined 3% as a result of too-high price increases having been taken for Wesson, where earnings were down significantly more than the corporate average. Management achieved higher-than-originally-expected cost savings in the consumer supply chain and in SG&A. Management is dissatisfied with these results.

Commercial foods sales rose 23%, and operating profit increased 18%. Here flour milling results were much better because of price increases covering prior cost increases in flour milling and Lamb Weston. An 18% operating profit increase reflects a very high-quality winter wheat crop, and quick-service restaurant sales are still holding up french fry demand. These very strong results are not expected to be repeated.

Operating profit from continuing operations rose 33%, and after-tax earnings from continuing operations were up 27%. Share count declined 8%.

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At the time of publication, Thomas had no positions in the stocks mentioned.