Conagra Brands (NYSE:CAG) discussed its Q1 FY2024 earnings in a recent call, reporting a minor drop in organic net sales due to an industry-wide slow recovery of volumes. Despite this, the company witnessed robust margin improvement and EPS growth. The firm has reaffirmed its guidance for FY2024, including an approximately 1% increase in organic net sales, an adjusted operating margin of 16% to 16.5%, and an adjusted EPS of $2.70 to $2.75. The company also highlighted current consumer behavior shifts, such as a reduction in discretionary purchases, but expects these to be temporary.
Key takeaways from the call:
- Conagra reported a 272 basis point increase in gross margin, driven by price mix and supply chain productivity initiatives, despite inflation in the cost of goods sold.
- The company's adjusted operating profit and margin increased across all operating segments, notably in the Refrigerated & Frozen segment.
- The company's adjusted EPS rose by 15.8% compared to the previous year.
- Conagra plans to prioritize debt reduction and lowering their net leverage ratio.
- The company expects volume trends to return to year-over-year growth in the second half of the year, supported by increased trade and A&P investments.
- Conagra executives are confident in their plans and agility to navigate the changing consumer environment.
In light of challenging consumer dynamics, the first quarter was tougher than expected. However, Conagra executives believe macro conditions will improve in H2, leading to increased investment in their merchandise. They do not anticipate negative pricing growth, attributing any volume impact to macro factors rather than individual brand pricing. They also expect improvements in categories like frozen fish, beans, and chili, following the resolution of disruptions from the previous year.
The company emphasized the importance of unit movement over dollar sales, noting a sequential improvement in unit movement according to Nielsen tracking data. They expect a step-down in gross margin in Q2 but predict it will remain similar in H2. The company has maintained their inflation assumption at 3%.
The company's CEO emphasized the importance of being patient and pragmatic in response to competitors' promotional efforts and changing consumer trends. The top priority for capital allocation is reducing leverage, but they remain open to future M&A opportunities, particularly in the frozen and snacks domains. The call concluded with a reminder that Investor Relations is available for further questions.
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