Conagra Brands readies for consumer spending cutbacks as behavior changes

He maintained that while Conagra expects to transition to a “more normalized operating environment”​ for fiscal 2024 following the COVID pandemic and unprecedented inflation, an overall category slowdown is taking place.

Unlike when higher inflation initially took hold, consumers aren’t trading down in the face of price increases, but instead are “hunkering down” and buying fewer items in total.

“Overall, we view this dynamic as likely temporary behavior shift for consumers to stretch their budgets,”​ Connolly said.

He suggested that consumers are making choices to manage their spending and putting that money toward alternate expenditures such as travel or covering other expenses, but they are not eating less.

“Importantly, it’s not a trade down within individual categories to lower-priced alternatives. It looks optically more like a cutting back,”​ he explained.

Connolly noted that it’s not just Conagra feeling the effects of the behavior shift but its “five nearing peers” are in the same situation, with everyone’s volume down just over 6% compared with two years prior.

The exec said the firm is carefully studying the shift, but pegged it as transitory and doesn’t expect it to continue for an extended period. He pointed out that some have speculated it’s a “summertime phenomenon” that will change in the fall.

Sales, profit up in Q4, fiscal 2023​

For the fourth fiscal quarter ending May 28, Conagra’s net sales were up 2.2% to $3 billion and gross profit advanced 9.8% to $783 million. Adjusted gross margin reached 27%, representing a 216 basis point increase from Q4 in 2022.

Supply chain disruptions stemming from a cybersecurity incident at frozen logistics partner Americold negatively impacted revenue by approximately 50 basis points during Q4, and by 110 basis points in the Refrigerated & Frozen segment.

In fiscal 2023 ending May 28, sales advanced 6.4% to $12.3 billion and the firm saw gross profit increase 15.0% to $3.3 billion.

Connolly pointed out that pricing peaked for the firm in Q3, but is still 17% ahead of the same period last year as the firm worked to offset inflation of cost of goods sold.

“There is an inherent lag between the time when inflation hits and when we are able to recover that cost through inflation-justified pricing,”​ he explained. While the lag resulted in compressed margins in fiscal 2022, the firm made “great strides to recover our gross margin in fiscal 2023.”​

Looking ahead, Conagra estimates organic sales growth of 1% in 2024 compared with 2023, as well as adjusted operating margin between 16% and 16.5%. Connelly added that the outlook takes into consideration the shifting consumer behavior.

New launches driving sales​

Conagra noted that launches since fiscal 2018 now generate almost $1.8 billion in sales, with new product launches since 2021 comprising more than half of that figure.

The firm’s “innovation engine” has been fueled by the frozen and snack categories. Together, the categories represent almost 70% of domestic sales on a dollar basis and have increased in share.

Despite price increases, seven out of Conagra’s top 10 frozen products held or gained share in fiscal 2023, Connolly explained.

The exec added that the firm is focused on premium products in subcategories such as frozen vegetables. “There is an element of value over volume strategy that remains central to our Birds Eye playbook there as we continue to drive premiumization and really more of a finished prepared vegetable product than a bag of commodity vegetables,”​ he said.

Within snacks, meat snacks and microwave popcorn also gained share in 2023.

Connolly noted there will be a full lineup of new innovations in fiscal 2024, “featur[ing] a compelling mix of convenient, value-added meals … and exciting licenses.”

Specifically, a “significant” new innovation will be launched by the end of the first quarter, he added.

“These innovations, coupled with our consumer and customer support, will help us effectively navigate the dynamic marketplace conditions,”​ Connolly said.

Strategic promotions, but no “deep discounts”​

Pricing and promotions were top of mind for Conagra execs during the call with analysts.

Connolly noted that while certain products may be affected by deflation, such as some meat products, the firm does not anticipate price rollbacks.

But overall, inflation will still be impacting the firm, and “surgical” pricing increases in specific product categories will be implemented to counteract that.

CFO Dave Marberger cited tomato-based products as one category that will experience high inflation in fiscal 2024.

Connolly explained that while the firm is comfortable with “category building promotions that have a positive ROI,”​ and expects more to roll out now that supply chains are in full swing, Conagra will not be relying on deep discount promotions to drive business.

Those promos “train the shopper to to buy on deal,”​ and the company has moved away from that strategy as it looks to grow its categories with innovation and displays instead, he said.

He acknowledged that with current consumer cutbacks, competitors may start to lean on harder deals to increase unit volume, but that he has not seen that to date.

“But this isn’t our first rodeo, we wouldn’t be surprised to see that again. So, we monitor that carefully,”​ Connolly said.