Conagra's (CAG) View Cut Despite Q2 Earnings Beat, Volumes Hurt
Conagra Brands, Inc. CAG delivered soft results for the second quarter of fiscal 2024 due to a difficult macroeconomic landscape. During the quarter, both the top and bottom lines declined year over year, and sales missed the Zacks Consensus Estimate. Results were affected by lower volumes stemming from the slowdown in consumption and the adverse impacts of pricing in certain segments.
Year-to-date results, anticipation of slower volume improvement and higher brand investments in the second half of fiscal 2024 prompted this Zacks Rank #4 (Sell) company to lower its guidance for fiscal 2024.
However, volumes in the domestic retail business saw a sequential improvement. The company’s strategic investments in the frozen business have been yielding favorably and helped boost market share in the quarter under review. Management remains committed to making further growth-oriented investments, with an aim to fuel momentum in the latter half of the fiscal and set a solid foundation for FY25.
Shares of the company have rallied 14.1% in the past three months compared with the industry’s growth of 13.4%.
Conagra Brands Price, Consensus and EPS Surprise
Conagra Brands price-consensus-eps-surprise-chart | Conagra Brands Quote
Quarter in Detail
Conagra’s quarterly adjusted earnings per share (EPS) came in at 71 cents, beating the Zacks Consensus Estimate of 67 cents. The bottom line declined 12.3% year over year due to lower gross profit.
Conagra generated net sales of $3,208.1 million, which dropped 3.2% year over year. Also, the metric missed the Zacks Consensus Estimate of $3,240 million. The top line included a 0.2% positive impact of currency movements.
Organic net sales decreased 3.4% due to a 2.9% drop in volumes, which stemmed from the continuation of the slowdown in consumption. Also, the price/mix had a 0.5% adverse impact on organic sales as a result of elevated strategic investments. Our model suggested a volume decline of 3.6% for the second quarter.
The adjusted gross profit tumbled 7.6% to $862 million. The adjusted gross margin contracted 129 basis points (bps) to 26.9%. The adverse impacts of the inflated cost of goods sold, lower organic sales and unfavorable operating leverage affected the gross margin, partly made up by increased productivity. We had expected the adjusted gross margin to contract 90 bps to 27.3%.
Adjusted SG&A expenses, excluding advertising and promotional (A&P) costs, dropped 4.1% to $279 million due to reduced incentive compensation.
Adjusted EBITDA (including equity method investment earnings and the pension and post-retirement non-service income) descended 7% to $661 million, mainly led by the lower adjusted gross profit.
Segment Details
Grocery & Snacks: Quarterly net sales in the segment came in at $1,295.1 million, down 4.1% year over year. Organic sales also fell 4.1% on a 0.4% decrease in the price/mix and a 3.7% drop in volumes. During the quarter, CAG saw share gains in staple and snacking categories like microwave popcorn and seeds, chili and hot cocoa.
Refrigerated & Frozen: Net sales and organic sales declined 5.8% to $1,338.5 million. Our model suggested a 3.5% decline in net sales and organic sales for the quarter under review. The price/mix fell 2.5%, with volumes down 3.3%. The company saw an improved share in frozen sides, frozen breakfasts and frozen single-serve meals.
International: Net sales advanced 8.1% to $279.6 million, reflecting improved organic net sales (up 5.6%) and negative currency effects (2.5%). We expected sales growth of 5.5% for the segment. Organic sales growth was driven by the price/mix, which was up 2.3%, and volumes, which rose 3.3% due to strength in the Mexico business.
Foodservice: Reported and organic sales advanced 4.3% to $294.9 million. The price/mix improved 6.8%, whereas volumes declined 2.5%.
Other Updates
The company exited the quarter with cash and cash equivalents of $61.5 million, senior long-term debt, excluding current installments, of $7,493.3 million and total stockholders’ equity of $9,074.2 million. Conagra paid out a dividend of 35 cents per share in the second quarter.
Guidance
For fiscal 2024, organic net sales are anticipated to decrease by 1-2% compared with the earlier view of a rise of nearly 1% year over year. The adjusted operating margin is expected to be roughly 15.6%, down from the earlier projected range of 16-16.5%.
Management envisions an adjusted EPS in the range of $2.60-$2.65 compared with the previously guided range of $2.70-$2.75. The company reported an adjusted EPS of $2.77 in fiscal 2023.
For fiscal 2024, capital expenditures are likely to be about $450 million, interest expenses are expected at nearly $440 million and the adjusted effective tax rate is anticipated at around 24%.
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