Shares of Conagra Brands Inc. (NYSE: CAG) remained in red territory on Friday. The stock has dropped 6% thus far this year. A day ago, the company reported its results for the first quarter of 2022, in which revenue and earnings declined year-over-year but managed to surpass expectations.
The company felt the pressure from inflation and supply chain headwinds during the quarter which took a toll on its results but despite these challenges, it remains optimistic about achieving growth in fiscal year 2022.
Headwinds and declines
Conagra faced inflationary pressures in the first quarter mainly due to increases in the costs of proteins, grains, and edible fats and oils since the last quarter. The company expects inflation to be higher than originally anticipated for the remainder of the year.
The effects of the pricing actions taken by Conagra over the past couple of months were not fully felt in Q1 but are expected to kick in as the year progresses. Currently the company estimates gross inflation to be approx. 11% for FY2022.
Like its peers, Conagra faced labor shortages, material supply issues, transportation costs and congestion challenges during the quarter. These issues crunched capacity affecting the company’s ability to meet the high demand it witnessed. Conagra’s sales fell 1% YoY to $2.65 billion in Q1. Inflation also took a toll on profitability with adjusted EPS dropping 28.6% to $0.50.
Despite these challenges, Conagra remains fairly enthusiastic on its growth path for the year. The company witnessed high demand levels during the first quarter. On a two-year CAGR basis, total company retail sales were up around 7% with strong performance in frozen products, snacks and staples. Conagra saw increases in household penetration and retention levels during Q1.
The company also sees some long-term trends that could benefit it in the years to come. One of these is the pattern of at-home food consumption by young adults. The demand for frozen food typically increases in households with kids and as young consumers grow their families, the company believes their consumption of Conagra products will increase, thereby driving growth.
In addition, in the current environment, as more people either work from home or exit the workforce, they are likely to have more meals at home. This has also led to more people trying their hand at cooking their own meals. These factors are anticipated to drive demand for Conagra’s staples and frozen food products.
Another tailwind is the momentum in snacking which is going steady. Conagra has a $2 billion ready-to-eat snacks business which is expected to see significant growth in the long-term from this trend.
Strength in ecommerce
Conagra’s investments in ecommerce are paying off with its $1 billion ecommerce business seeing strong growth during Q1. Ecommerce sales represented more than 9% of total retail sales in Q1, more than doubling from where it stood at two years ago.
Conagra raised its FY2022 organic sales guidance to be approx. plus 1% up from the earlier projection of approx. flat given last quarter. Adjusted EPS is expected to be approx. $2.50.
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