CHICAGO — The combination of Conagra Brands Inc.’s successive price increases catching up to the lag period between when they are announced and take affect and an easing in the rate of inflation of most cost of goods sold (COGS) underpinned the company’s strong performance during the second quarter of fiscal 2023. The company’s gross margin rose 310 basis points to 28.2% during the quarter and management is guiding healthy gross margins in the quarters ahead.
“When unprecedented inflation increased our cost of goods, we took strategic pricing actions to help offset the rising costs,” said Sean M. Connolly, president and chief executive officer, during a Jan. 5 conference call with securities analysts to discuss second-quarter results. “However, there was an inherent lag between when we implemented pricing actions and when we realized the benefits of those actions in our top-line results, this pricing lag resulted in temporary margin compression. Furthermore, continued inflation extended this period of margin compression as new inflation-justified pricing actions led to additional lag effects.
“That is the dynamic we have experienced over the last several quarters as we continue to play catch-up by increasing price incrementally to account for the extraordinary extended rise in inflation. At the end of the first quarter, we reached a significant inflection point in the relationship between net sales and COGS, marking the end of the temporary margin compression phase in the beginning of the margin recovery phase.”
Conagra’s net income for the quarter ended Nov. 27, 2022, was $381.9 million, equal to 80¢ per share on the common stock, and an improvement when compared with the same period of the previous year when the company earned $275.5 million, or 57¢ per share.
Quarterly sales rose 8.3% to $3.3 billion. Organic net sales rose 8.6% during the quarter.
“Our top-line growth was coupled with encouraging progress in a number of different areas of our supply chain that enabled us to operate more efficiently,” Connolly said.
David S. Marberger, chief financial officer, said management expects gross inflation to continue, but moderate throughout the remainder of the fiscal year and result in an inflation rate of approximately 10%. The inflation rate during fiscal 2022 was between 16% and 17%, according to the company.
“I think what you’re seeing now is a reflection of good execution on our part and kind of the beginning of the sunsetting of the super cycle,” Connolly said. “And that’s why we say we think we’ve got some runway from here as the supply chain continues to improve and productivity continues to ramp up.”
Connolly called the impact of price elasticity on Conagra’s brands “muted” and noted it reflected Conagra’s product categories that have limited private label exposure and because consumers are continuing to eat at home more.
Conagra’s Refrigerated and Frozen business unit sales increased 10.5% to $1.4 billion during the quarter, with price/mix providing a 16% benefit and volume falling 5.5%.
“We maintained our momentum, delivering strong retail sales growth on both a one- and three-year basis, improving 9% and 26%, respectively,” Connolly said. “This growth was driven by a number of our key categories, including breakfast sausages and single-serve meals, which both experienced double-digit retail sales growth compared to last year.”
Grocery and Snacks business unit sales rose 6.8% to $1.3 billion. Price/mix provided an 18.4% tailwind while quarterly volumes fell 11.6%.
An analyst on the call noted Grocery and Snacks volumes were weaker than expected, but Connolly countered they came in where they were expected due to the magnitude of pricing taken during the first half of the fiscal year. He added that quarterly year-over-year shipments were skewed by strong segment sales during the same period a year ago.
For the first half of fiscal 2023, Conagra’s net income was $304.4 million, or 63¢ per share, and down from $511.6 million, or $1.06 per share, the year prior.
First half sales rose 8.8% to $6.2 billon.
For fiscal 2023, Conagra raised its fiscal 2023 guidance for organic net sales to be in a range between 7% and 8%, up from the prior guidance of 4% to 5%. Adjusted earnings per share are now forecast to be in a range of $2.60 to $2.70 per share, up from $2.38 to $2.48 per share.
“Our top-line growth was coupled with encouraging progress in a number of different areas of our supply chain that enabled us to operate more efficiently,” Connolly said. “Together, these factors as well as improvement in the inflationary environment helped us recover our margins to near pre-pandemic levels. As a result of our strong performance, we're raising our full year fiscal ‘23 guidance.”