Analyst Note| Rebecca Scheuneman, CFA |
Over the past several years, Conagra has made many changes to improve its growth and profit margin profile, changes we think the market underappreciates. The firm significantly reshaped its portfolio toward faster growing categories and overhauled its innovation process to be based on behavioral data, which is more reliable than gathering insights via consumer responses from surveys and panels, a practice common in the industry today. Conagra also dramatically shifted its marketing investments toward more relevant and efficient digital formats and extracted significant costs from its operations. As a result, Conagra has swung from market share losses to modest gains, from declining sales to growth (even before the pandemic), and improved operating margins from 10.8% in 2015 to 16.5% in fiscal 2020. We think the pandemic likely accelerated its turnaround, as it resulted in four and a half years of incremental new buyers and saved the firm hundreds of millions in customer acquisition costs, per management. While we are impressed with these improvements, we think Conagra still falls short of a moat. We think it will be difficult for its brands to maintain their leadership positions given the firm’s relative underinvestment in marketing and innovation (4.2% and 0.6% of sales for Conagra, respectively, versus 5.3% and 1.3% for peers).