Conagra cuts fiscal outlook: ‘The pace of the shift back to normal consumer behavior has been slower than we initially expected’

05-Jan-2024 - Last updated on 05-Jan-2024 at 14:36 GMT

Source: Getty/ AJ_Watt

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Conagra Brands no longer expects a modest increase in organic net sales in fiscal year 2024 – rather it is bracing for a 1-2% decline over last year along with tighter margins and a lower earnings per share due to a “slower pace of volume recovery” than expected.

However, “the tide appears to be turning” with consumers responding positively to the company’s initial brand building efforts, which helped staunch sales declines in test segments, CEO Sean Connolly told investors Jan. 4 during the company’s second quarter earnings call.

“After tremendous initial resilience in the face of a record inflation super cycle, US consumer behavior shifts did emerge last spring in our industry as the cumulative effect of inflation caused consumers to begin to stretch their budgets. This resulted in a reprioritization of food choices as shoppers adjusted purchase behavior towards more stretchable meals,” Connolly said.

Initially, he said he believed these trends would be “transitory,” and while he says he still believes that to be the case, “the pace of the shift back to normal consumer behavior has been slower than we initially expected, and that pressured our volume, performance and mix in the second quarter.”

As a result, the company’s organic net sales in the second quarter fell 3.4% to $3bn compared to last year and the adjusted gross margin fell 129 basis points to 26.9% from last year. The adjusted operating margin slipped 108 basis points to 15.9% and adjusted earnings per share are down 12% to 71 cents compared to last year.

Brand building investments bolster volumes

While volumes may remain supressed in the near future, Connelly sees hope on the horizon.

"While the consumer is still deploying some value-seeking tactics when they shop, we are seeing clear progress when it comes to volume recovery,” Connelly told investors.

For example, in the second quarter, Connelly said Conagra’s frozen and refrigerated segments in which volumes improved, thanks in part to strategic and selective brand building investments.

“We believe it is important to understand consumer readiness to resume more typical shopping behaviors before more fully ramping-up investments to facilitate the process. We want to be confident that our investments will have the desired impact. With that in mind, during the second quarter, we did invest in certain key businesses to assess consumer response to increased brand building stimulus. Most noteworthy was our largest frozen business, single-serve meals, where we deployed high-quality merchandising nationally,” Connolly said.

“The results were very encouraging, with lifts up 60%. These lifts ultimately drove meaningful gains in our market share,” and helped the business approach 51% of unit share of category, he said.

These investments also lifted refrigerated and frozen segment volume from minus 10.5% in the first quarter to minus 3.3% in the second quarter.

“Overall, our targeted investments in Q2 helped cut the total domestic retail volume decline in half compared to the first quarter, not all the way back, but good progress,” he added.

Based on these results, Connolly said the company is confident that multifaceted brand building investments slated for the second half of the year will drive momentum into 2025. But, he added, the company also needs to be realistic, hence trimming its guidance for the remainder of the current fiscal year.