ConAgra Foods Inc., under pressure from an activist investor, said it plans to jettison its struggling private-label business less than three years after spending $5 billion to buy it.
Chief Executive Sean Connolly, in his first public comments on strategy since taking the helm April 6, also said Tuesday that the maker of Chef Boyardee and Slim Jim snacks would consider other strategic moves to bolster ConAgra amid broad tumult in the packaged-food business.
“We are quite clear-eyed about the need for change,” Mr. Connolly said on a conference call, adding that ConAgra would consider selling other units as well as buying food brands that would fill gaps “in critical areas like organic, natural and premium gourmet.”
The plans come after Jana Partners LLC, which had built a more than 7% stake in ConAgra, blasted the company in mid-June for its handling of the Ralcorp Holdings Inc. business that ConAgra bought in January 2013. Jana on Tuesday offered qualified praise for the new moves ConAgra announced.
ConAgra’s private-label division makes cereal, pasta, condiments and snacks for supermarket to use as their house brands. Overall sales in that sector have expanded in recent years, as big retailers boost their in-house offerings to compete against mainstay brands.
When ConAgra in late 2012 announced the deal for Ralcorp, whose big customers then included Trader Joe’s and Costco Wholesale Corp., it said it planned to use the ability to buy ingredients in greater bulk, and its manufacturing and distribution capacity to run the combined business more efficiently and boost margins.
But private-label’s growth has drawn more competition, suppressing margins, while at the same time grocery chains have demanded higher quality without higher prices. Some analysts say Ralcorp also proved difficult to integrate because the businesses are so different. There was little overlap in product lines, which was a virtue in that the store brands didn’t compete directly with ConAgra’s brands, but also limited synergies, and the acquisition spread management’s focus. In addition, bidding for private-label contracts requires different expertise than planning product promotions and vying for shelf space in grocery stores.
ConAgra executives have said the issues aren’t a result of industry challenges or owning both a branded and private-label business. They said they discovered after buying Ralcorp that its problems were worse than anticipated, including poor customer satisfaction and manufacturing issues. ConAgra was forced to drop its prices to repair customer relationships, which damaged its profitability. To date it has written down the value of the private-label unit by some $2.2 billion.
In the latest quarter, the private-label division reported a 1% sales decline, despite the benefit of an extra week. Profit was dented by higher commodity costs and the lower sales volumes, the company said.
Mr. Connolly said Tuesday that further attempts to repair the unit would be a poor use of ConAgra’s resources, adding “We have come to the conclusion that [ConAgra’s private-label business] will be more valuable outside of ConAgra.” He didn’t detail ConAgra’s plans, but indicated a sale is likely, saying, “We believe there will be significant interest from potential buyers.”
Analysts said the private-label unit could attract acquirers such as TreeHouse Foods Inc., which specializes in such products, or Post Holdings Inc., which makes foods for store labels as well as its own brands. TreeHouse said it doesn’t comment on speculation. Post didn’t return a request for comment. Citigroup estimated ConAgra could get $3.7 billion for the business.
Jana’s managing partner, Barry Rosenstein, said he is glad Mr. Connolly is “leaving all options to maximize shareholder value on the table.”
“Today ConAgra acknowledged the need to pursue a new strategic direction,” Mr. Rosenstein said. “We look forward to our ongoing discussions with the company and its advisers on these and other matters.”
Mr. Connolly said ConAgra plans to cut costs and improve margins, while making its remaining operations more focused and contemporary.
He said the process won’t be “an overnight fix,” and acknowledged challenges the food industry faces from consumers’ shifting to more natural and organic products as well as choosing fresh food over the shelf-stable items and frozen meals ConAgra makes. He pointed to his previous role as CEO of Hillshire Brands, which last year was bought at a lucrative premium by Tyson Foods Inc.
“Frankly, aspects of the situation are not all that different from when I joined Sara Lee and led the transformation into Hillshire brands,” he said. “At Hillshire, we reinvigorated iconic brands that had become stale and returned them to growth.”
ConAgra also reported earnings Tuesday, posting a 3.7% sales increase in its fiscal fourth quarter to $4.1 billion. Profit totaled $209.2 million, or 48 cents a share, compared with a year-earlier loss of $324.2 million, or 77 cents a share. Shares rose 29 cents to $43.72.
In contrast to the sales decline in the private-label division, sales in the consumer foods unit, such as Hunt’s ketchup and Pam cooking spray, rose 4.5%, and its commercial foods segment—which sells to restaurants and other food-service customers—increased 6.6%, boosted by Lamb Weston potatoes.
Excluding impairment and restructuring charges, among other items, per-share earnings from continuing operations were 59 cents.
Analysts surveyed by Thomson Reuters recently projected 59 cents a share in earnings and $4.14 billion in revenue.
By Annie Gasparro