Consumer staples companies are among the worst affected by inflation and macro uncertainties, and Conagra Brands, Inc. (NYSE: CAG) is no exception. After a relatively weak first half, the packaged food company is making targeted investments in the business to build momentum, taking a cue from improvements in volume trends in its domestic retail business.
Investing in CAG
Shares of the Chicago-headquartered company, which owns iconic brands like Birds Eye and Healthy Choice, have been trading sideways after slipping to a two-and-half-year low in September last year. The stock experienced an upswing in the past few weeks and it is trading broadly in line with the 52-week average. While the stock’s near-term prospects look weak, it should benefit from the strength of the brand in the long term – the company has a good track record of sustained growth and delivering value to customers. Being a high-yield dividend stock, CAG has been a favorite among income investors.
The continuing softness in consumer demand, especially for the frozen and refrigerated categories, remains a concern as far as returning to high growth is concerned. Margins might come under pressure from increased spending on promotional activities to boost the top line. The strategy of passing on higher input costs to customers can offset the benefits of the recovery in volumes. At the same time, consumers have become more price-conscious and tend to spend less on expensive items.
Conagra’s CEO Sean Connolly said at the Q2 earnings call: “As we look ahead to the second half, we have a robust investment plan in place, reflecting our increased confidence in consumer responsiveness to brand building levers. Our goal is to continue to build momentum with our consumers as we move through the back half of the fiscal year, and then enter fiscal ’25 in a position of strength. I will share more on our multifaceted action plan in a few minutes. Finally, we are updating our guidance for fiscal ’24, reflecting both the consumer environment and the additional brand investments in the second half of the year.”
Q3 Report on Tap
When Conagra Brands reports third-quarter results on Thursday, April 4, 2024, Wall Street will look for adjusted earnings of $0.64 per share. In the year-ago quarter, the company had earned $0.76 per share, excluding special items. The consensus revenue estimate for the February quarter is $3.01 billion. Quarterly earnings exceeded estimates regularly for over a year. In the second quarter, earnings declined 12% annually to $0.71 per share.
The bottom-line performance was negatively impacted by a 3% decrease in net sales to $3.21 billion, broadly in line with analysts’ estimates. The core business divisions, Grocery & Snacks and Refrigerated & Frozen, witnessed a decrease in sales. The management’s cautious full-year guidance – projecting a decrease in organic sales and lower adjusted earnings – indicates a flat second half.
On Thursday, CAG opened slightly below $30 and traded higher during the session. After several highs a lows, the stock has now returned to where it was at the beginning of the year.