When it came to light a little while ago that ConAgra (NYSE:CAG) was interested in acquiring Ralcorp (NYSE:RAH) and really focusing on private label food, it made a lot of sense. With another quarter in the books, it is increasingly clear that they may be ConAgra's only real chance of competing - this company just cannot gain much traction in the supermarket and has done little to improve a portfolio of brands that lacks leaders. (For more on supermarket stock, check out Evaluating Grocery Store Stocks.)

TUTORIAL: Budgeting Basics

A Weak Close to the Fiscal Year
ConAgra's press release boasts of "strong" comparable growth, but I have to wonder what definition of "strong" the company is using. Yes, revenue was up over 5% this quarter and that's not bad for a large food company. What ConAgra management is glossing over, though, is that sales in the year-ago period were down about 5%, so the comp was especially easy. In fact, sales in this quarter were still lower than in 2009, so just exactly how strong does ConAgra think their business is? It is worth noting, though, that this is the first positive comp after four straight negative quarters.

Looking further at the top line, the consumer business saw less than 1% growth as a modest boost from pricing was overwhelmed by a fall in volume. Commercial sales were much stronger, though, and climbed about 14%.

Profitability is problematic. Management referred to 9% input cost inflation in consumer foods and that is a difficult hurdle to surmount. Gross margin fell about two points this quarter, while adjusted operating profit rose nearly 12% as the company did an admirable job of cutting internal expenses. (For more on how you can cut your cost, read The Beauty Of Budgeting.)

Minimal Brand Value
Food companies do not have to be good at everything they do to succeed, but they need to be good at something. While ConAgra has a decent position in frozen dinners - a relatively close second behind Nestle (Nasdaq: NSRGY.PK) and ahead of Heinz (NYSE:HNZ) and Tyson (NYSE:TSN) - they are distant players behind Heinz, Campbell Soup (NYSE:CPB) and General Mills (NYSE:GIS) in markets like ketchup and soup.

On one hand, ConAgra is a very diverse food company. Compared to even Kellogg (NYSE:K) or Kraft (NYSE:KFT), ConAgra is not very dependent upon any single category after frozen dinners. Still, the company's unit volume is weak and unpopularity risks seeing vendors like Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Costco (Nasdaq:COST) shuffle them off in favor of giving that valuable selling space to more popular brands.

What's Next?
ConAgra produces ample cash flow (enough to repay debt, pay dividends and buy back stock), so it is not as though the status quo is untenable. Still, sooner or later investors are going to demand better performance and get increasingly vocal about it. If ConAgra doesn't want someone like Carl Icahn showing up at the door, management needs to figure out a new strategy and go about it.

Perhaps trying to go back to the table with Ralcorp is an option, or targeting another private label company like Treehouse Foods (NYSE:THS), Frozen Specialties, Seneca Foods or Richelieu Foods. Alternately, the company could try to find buyers for its lesser brands and use the capital to acquire more popular brands (and marketshare) - maybe a focused business like Tootsie Roll (NYSE:TR) would fit the bill.

The Bottom Line
Yielding almost 4%, ConAgra is not a bad income option, provided management does not do something shockingly silly in pursuit of growth or job preservation. In fact, for a company that is translating a fair bit of its sales into free cash flow, this could be a decent candidate for a patient turnaround investor, provided management can give some clear sense of how they are going to go about making things better. For more growth or capital gains-oriented investors, though, this is a harder sell and ConAgra should probably stay on the shelf for now. (To learn more about investing in retail, check out The 4 R's Of Investing In Retail.)

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