Conagra's (CAG) Frozen & Snacks Strength Aids, High Costs Ail
Conagra Brands, Inc.’s CAG frozen and snacks categories are thriving, driven by its commitment to innovation. Though costs associated with these innovations pose a threat to profits, the company’s justified pricing actions have been offering relief.
Focus on Frozen and Snacks Divisions
Conagra's innovation efforts have been concentrated on the frozen and snacks categories, both of which have shown remarkable growth over the past four years. On its fourth-quarter fiscal 2023 earnings call, management stated that the frozen and snacks categories have improved 9% and 8%, respectively, over the past four years. Together, these categories form about 70% of the company’s domestic retail dollar sales.
Growth in the frozen category reflects the strength of the company’s brands and the effective execution of the Conagra Way playbook. In the fourth quarter, Conagra saw an improved share in multi-serve meals, frozen sides and frozen breakfast sausages. During fiscal 2023 (a year of considerable pricing), seven out of the company’s top 10 frozen product categories either held or increased unit share.
Moving to snacks, Conagra’s two biggest snacking platforms — meat snacks and microwave popcorn — witnessed increased unit share in fiscal 2023. Management expects fiscal 2024 results to benefit from the company’s investments in innovation in these categories.
Cost Woes, an Industry Challenge
Conagra faced cost inflation in the fourth quarter of fiscal 2023. The adjusted gross margin was adversely affected by the increased costs of goods sold, including unfavorable commodity positions, and an unfavorable operating leverage. Management anticipates the net cost of goods sold inflation of nearly 3% in fiscal 2024.
Adjusted SG&A expenses, excluding advertising and promotional costs, surged 24.3% to $301 million in the fourth quarter, primarily driven by higher incentive compensations and increased investments in the supply chain and technology. Advertising and promotional costs also increased substantially, reaching $69 million, up by 49.7% compared to the year-ago quarter. Management foresees continued investments in advertising and promotional activities and SG&A in fiscal 2024 to support ongoing innovation efforts.
Other players like McCormick & Company, Incorporated MKC, Sysco Corporation SYY and Flowers Foods, Inc. FLO have also been grappling with cost inflation.
In the second quarter of fiscal 2023, McCormick’s adjusted gross margin was somewhat offset by escalated cost inflation. Further, MKC’s SG&A expenses increased year over year due to elevated employee incentive compensation expenses and increased distribution costs. McCormick also witnessed a spike in brand marketing costs in the second quarter and expects an even greater year-over-year rise in brand marketing costs in the third quarter.
Sysco has been encountering product cost inflation in the U.S. Foodservice unit for a while now. In the fourth quarter of fiscal 2023, SYY witnessed product cost inflation of 2.1% for the overall company, which was measured by estimated changes in product costs, mainly in the frozen, canned and dry categories. Apart from this, adjusted operating expenses rose 1.9%. Sysco anticipates its International segment to remain inflationary in fiscal 2024.
Flowers Foods continued to be impacted by input cost inflation, reduced production volumes, higher product returns and elevated maintenance costs in the second quarter of 2023. FLO expects inflation to persist in 2024. Additionally, FLO witnessed a rise in marketing expenses in the second quarter of 2023. The company’s adjusted selling, distribution, and administrative expenses expanded 70 basis points to 38.2% of sales. Flowers Foods’ increased focus on marketing and innovation behind brands is likely to increase its cost burden in the near term.
Pricing Offers Respite to Conagra
Conagra has successfully navigated cost challenges through its pricing initiatives. In the fourth quarter of fiscal 2023, the company witnessed a 9.9% improvement in the price/mix, which contributed to 2.2% growth in organic sales. This was attributed to Conagra's strategic pricing actions in response to inflation.
Across various segments, the price/mix exhibited strong growth, with increases of 9.1%, 10.4%, 13.8% and 9.3% in the Grocery & Snacks, Refrigerated & Frozen, International and Foodservice sectors, respectively. The continuation of these strategies is expected to benefit Conagra going forward, with fiscal 2024 organic net sales projected to rise around 1% year over year.
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Conagra Brands (CAG) : Free Stock Analysis Report
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