Conagra lifts profit forecast as price hikes offset demand pressures

By Deborah Mary Sophia and AnneFlorentyna GnanarajaSekar

(Reuters) – Conagra Brands Inc raised its full-year profit forecast on Wednesday, as the Slim Jim beef jerky maker bets on price increases to shield its margins at a time when demand for its frozen foods and snacks showed signs of weakening.

Shares of the company rose about 2% in early trade, as the Act II microwave popcorn maker said sales volumes would start to rebound, allaying investor concerns around demand falling further.

Packaged food companies have been raising product prices to limit margin pressures from elevated costs of packaging materials, transportation and labor.

Price hikes as well as easing inflation in commodities including meat and other proteins helped Conagra’s gross margin rise 325 basis points to 27.2% in the third quarter ended Feb. 26.

However, higher food prices have forced some consumers to ditch branded food products and instead hunt for cheaper, private-label alternatives, eating into sales volumes at Conagra.

“All the pricing that we need to take has already been executed and is in the marketplace,” CEO Sean Connolly said in an interview with Reuters. “At this point we don’t have additional need. It’s always subject to change if we get hit with another spike in inflation.”

Conagra also grappled with manufacturing issues that led to some out of stock items, especially in its canned meals and sides businesses. This contributed to a 9% fall in total sales volumes – its eighth straight quarterly decline.

That drop was “steeper than packaged food peers and a sign that Conagra may be experiencing heightened competition from private-label brands,” CFRA analyst Arun Sundaram said.

Connolly added in the interview that just over 20% of the company’s sales in its third quarter were made on promotion or with discounts, lower than competitor companies.

“Selectively, as the supply chain comes back online, we may have an opportunity to do more high quality, high (return on investment) holiday promotions,” he said.

Conagra trimmed the top end of its annual organic net sales growth forecast to 7% to 7.5%, compared with a 7% to 8% rise estimated earlier.

However, the root causes behind volume pressures have been largely resolved, Connolly said on an earnings call, adding he expected volumes “to rebound sequentially from here.”

Conagra, which topped expectations for quarterly results, now expects fiscal 2023 adjusted per-share profit between $2.70 and $2.75, compared with its prior forecast of $2.60 to $2.70.

(Reporting by Anne Florentyna Gnanaraja Sekar and Deborah Sophia in Bengaluru; Additional reporting by Jessica DiNapoli in New York; Editing by Rashmi Aich and Daniel Wallis)