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A Stock You Shouldn’t Buy

August 02, 2014 | About:
Suravi Thacker

Suravi Thacker

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The woes of some retailer seem to be endless. There has been a shift of consumers to other breakfast options from the traditional idea of having cereals. This has brought a list of problems to the cereal providers who are highly dependent on cereal sales for their survival. According to Wall Street journal, cereal volume sales have dropped 3% in the last 12 months.

Therefore, it is obvious that companies such as Kellogg (K) and General Mills (GIS) are facing the effects. Even ConAgra (CAG) is among those companies, as clearly evident from its recently reported fourth quarter numbers. However, it was not only cereal sales, which have dragged the retailer’s performance down. There is more to it. Let us understand.

Shift in customer preference

Revenue dropped 3% over last year, clocking in at $4.4 billion. This drop in sales was mainly because of lower sales witnessed in the Consumer Foods segment. Revenue from this segment declined 7.4% over last year as volumes fell 7%. Also, unfavorable currency movements affected revenue by 1%. However, these were partly offset because of the increase in prices.

One of the bright spots for ConAgra was the Commercial segment, which registered a growth of 1% as sales from Lamb Weston potato business increased. But sales from Private Brands remained flat at $1 billion. This segment comprises cereal sales, company’s own products and newly acquired Ralcorp Holdings’ products.

Cereal business has been doing badly mainly because of the emergence of so many breakfast options such as sandwiches and smoothies. Even General Mills reported a 3% decline in its overall revenue since volumes were affected due to lower consumer demand. However, the company is making efforts to expand its cereal business by introducing new varieties of the same.

For instance, Kellogg is marketing cereals as an evening snack. This additional usage of cereals should help in boosting its sales.

Digging in

Although companies are finding ways to overcome the problem of lower demand, there are other difficulties too. Food costs have been rising which is putting a pressure on ConAgra’s bottom line as well as its margins. Also, offering higher discounts to customers, in order to boost private label sales, hampered its earnings. This led to a drop in the earnings to $0.55 per share from $0.60 per share, in the prior year’s quarter.

Acquisition of Ralcorp Holdings in 2012 was made to expand the private brands segment, which was growing remarkably at that time. This was because cash strapped consumers wanted low priced products after the recession. However, preferences changed and now customers seem to be moving away from such products and are looking for national brands. Hence, private label grocery store product sales have declined to 21.9% of total unit sales from 29%, a few years back. Hence, this acquisition did little to help ConAgra’s top line.

Key points to note

Nonetheless, the company is trying to overcome the tough situation by marketing its products well and diversifying its product portfolio. Also, it plans to cut its costs in order to save its bottom line to plunge further. It plans to pay off its debt during the year in order to decrease SG&A costs. Also, ConAgra declared that it will continue to pay a dividend of $1.00 per share, which delighted the investors to some extent. However, the prevailing problems and lack of demand makes me doubtful about the food retailer’s prospects. Staying away from this company is a better idea.


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