Is There a Silver Lining to ConAgra Foods' Struggles?

ConAgra Foods (NYSE: CAG  ) is in a bad spot. Its core consumer franchise is suffering from shifting consumer preferences. One of ConAgra's most important brands is Healthy Choice, which isn't selling nearly as well as it used to because consumers are shying away from packaged frozen meals. But its other core brands, Orville Redenbacher's and Chef Boyardee, are also performing poorly, which matters a lot to the company since these three brands cumulatively bring in more than $1 billion in annual sales.

This is affecting all sorts of shelf-stable companies including Campbell Soup (NYSE: CPB  ) .

With all of this in mind, you might be tempted into thinking ConAgra is doomed. But it's worth noting that the company is making progress on these and other initiatives. At the very least, ConAgra is shoring up its balance sheet by paying down debt, which is possible since it still holds popular brands that generate cash flow. And, it's about to cut costs to shore up additional cash.

Because of this, ConAgra may be worthy of patience.

ConAgra doing the dirty work
It's certainly true that ConAgra isn't doing very well. Its three core consumer brands -- Orville Redenbacher's, Healthy Choice, and Chef Boyardee -- are all stagnating. Volume in ConAgra's consumer-foods division dropped 7%, which was much more than the 3%-4% decline management expected.

In all, ConAgra posted a net loss of $0.76 per share in the fourth quarter compared to a profit of $0.45 per share in the same period last year. ConAgra got blindsided by shifting consumer preferences away from packaged foods in favor of fresher alternatives.

The same thing hit Campbell Soup, which reported just a 1% increase in organic sales last quarter. Campbell generated 7% growth in adjusted earnings per share thanks to cost cuts, but management noted its performance fell short of its expectations. It's easy to see why since the company cut its fiscal-year sales guidance.

Frozen and shelf-stable foods aren't doing well, and it's not just about Healthy Choice. Management stated on its conference call with analysts that Chef Boyardee's performance was also a disappointment. At the beginning of the fiscal year, the company decided to eliminate the easy-to-open lid design on its cans, which management now admits was a strategic error.

It's recently added it back, and it's also going to leverage its marketing capabilities to stress its Chef Boyardee microwave cups, which are connecting well with consumers. Based on all of this, there may be considerable brand equity left for Chef Boyardee.

Battening down the hatches
To the company's credit, it's making some wise moves while it gets its act together. It's not content to simply sit still; it's getting proactive. In response to sluggish sales, ConAgra announced a strict cost-control program to keep profits afloat. First, it's committed to saving $100 million just in selling, general, and administrative costs by the end of fiscal 2016.

In addition, ConAgra expects to pay down $1 billion in debt in the upcoming fiscal year. This will be accomplished partly with existing operating cash flow, projected to reach $1.6 billion this year, as well as $530 million in net proceeds from a distribution of its Ardent Mills stake. This is on top of the $600 million in debt the company paid down last year.

This is the right thing to do since the company carries more than $8.5 billion in senior long-term debt and another $2.6 billion in what it calls "other [non-current] liabilities" compared to just $5.3 billion in shareholder equity.

It goes without saying that ConAgra's sales and volume declines are concerning. But at the very least, it's good to see the company getting its fiscal house in order as its turnaround gains traction. Paying down its hefty debt load and cutting costs must get done in the interim while its strategic turnaround takes hold. That's why, although it's hard to see, there may be a light at the end of ConAgra's tunnel.

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