By Annie Gasparro
ConAgra Foods Inc.'s Chief Executive Sean Connolly faces the
first opportunity since he took the helm to discuss his strategy
for the packaged-food maker when it announces quarterly earnings
this week. With an activist investor targeting the maker of Slim
Jim snacks and Wesson cooking oil, he will be under pressure to
perform.
Jana Partners LLC, which has built a more-than 7% stake in
ConAgra, called on it this month to change its board, pointing to
huge problems the company has had integrating the private-label
foods company Ralcorp that it bought nearly three years ago for $5
billion.
Mr. Connolly, who took over as CEO on April 6, likely will be
asked on Tuesday's fiscal year-end earnings call about his views
for the future of the private-label unit as well as the main part
of the company, whose brands also include Chef Boyardee canned
pasta, Healthy Choice frozen meals and Peter Pan peanut butter.
An industry veteran who got his start at Procter & Gamble
Co., Mr. Connolly most recently headed Hillshire Brands from 2012
to its takeover last year by Tyson Foods Inc. While that deal
wasn't one he initiated, it delivered huge value to Hillshire
shareholders, with a roughly 70% premium to the share price before
Tyson and Pilgrim's Pride Corp. began bidding for the company.
Some analysts think Mr. Connolly can unlock value from Ralcorp
despite the botched integration so far.
"While private label may continue to underperform in the near
term, new CEO Sean Connolly's strategic prowess could be exactly
what's needed to maximize value," said Jonathan Feeney, analyst at
Athlos Research, a Pennsylvania-based investment adviser. Mr.
Feeney, who recommends the stock, said Mr. Connolly rejuvenated
neglected brands at Hillshire, positioning it for the lucrative
sale to Tyson.
Some analysts say ConAgra needs to strike a deal to get rid of
Ralcorp to recover from the mess, perhaps selling the division to
private-brand rival TreeHouse Foods Inc. or to Post Holdings Inc.
Separately, analysts said, ConAgra's branded business could fit
well in some sort of combination with Pinnacle Foods Inc.--which
Mr. Connolly knows well, having struck a deal to buy it when he was
at Hillshire right before Tyson swooped in and acquired his
company.
TreeHouse declined to comment. Pinnacle didn't return a request
for comment.
"I've been doing this for about 23 years, 24 years now and over
that time, I have managed all sorts of businesses," Mr. Connolly
said in brief comments on ConAgra's earning call in March, when he
hadn't yet started as CEO. "So I am very comfortable here at
ConAgra Foods with the businesses we've got."
But at that time, he said he needed a few months to learn more
about ConAgra before he could outline a strategy for investors--one
they are hoping to hear more about this week.
In its fiscal year that ended in May 2012, ConAgra reported a
net profit of $474.4 million. Two years later, in its first full
fiscal year with Ralcorp on its books, that had fallen to $315.1
million, even though total revenue rose by a third to $17.7
billion. Through the end of March, ConAgra had posted a total of
more than $2 billion in losses tied to Ralcorp.
ConAgra's former CEO, Gary Rodkin, and former head of private
label, Paul Maass, said in March that the turnaround in that
business was taking longer than expected, but remained committed to
the business and said it would achieve growth in fiscal 2016.
Mr. Maass at the time touted improvements in speed and agility,
and a plan to tailor different strategies and sales people to each
category within the private label business, such as pasta or
crackers, rather than operating the same throughout the division.
"We have deep product knowledge, category by category, customer by
customer. This kind of focus has worked well for us prior to
acquiring Ralcorp and it can work for us again," Mr. Maass said
then.
With Messrs. Maass and Rodkin both gone, there's potential for
more drastic measures. ConAgra's private-label business now
represents 23% of its total sales. The company can't afford to
continue struggling with the business, analysts said. "In fact,
many investors could be disappointed if the business is not sold,"
said Bernstein analyst Alexia Howard.
Jana Partners is seeking two board seats in ConAgra, claiming in
a regulatory filing that since the Ralcorp acquisition, ConAgra's
"board has failed to adequately address the destruction of
shareholder value caused by the acquisition."
Other areas of interest to analysts on Tuesday will be which
branded foods will be a priority for Mr. Connolly. From Wolf canned
chili to Snack Pack pudding, that division is also facing
significant hurdles as Americans seek fresher options and foods
that seem to have more natural ingredients. ConAgra's frozen
dinners, like its Banquet and Healthy Choice brands, have lost
their appeal as refrigerated, ready-to-heat, meals at grocery store
delis become more popular.
Mr. Connolly may outline which brands he intends to spend money
on marketing and innovating, and which will be stripped of
resources or possibly sold.
The Week Ahead looks at coming corporate events.
Write to Annie Gasparro at annie.gasparro@wsj.com
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