Pressure on freight and input costs Conagra’s earnings
Conagra Brands’ performance was impacted by rising commodity costs in the third quarter of its fiscal year, which concluded on February 25. Determining whether the inflationary pressure is a long-term trend or will lessen as the year goes on is the difficulty facing the management of the organization.
President and CEO Sean M. Connolly stated, “…inflation is trending well above the 2.7% we anticipated as part of our initial fiscal ’18 guidance,” on a March 22 conference call with financial analysts. “Input and transportation prices, which have increased dramatically throughout the business, are both impacted by inflation. Overall, Q3 saw pressure on gross margins in spite of our efforts to price ahead of our categories.
As we’ve previously stated, margins may fluctuate from quarter to quarter in addition to our typical seasonality. We will also seek to sell lower-margin companies as we proceed with our transition, adding margin-accretive innovations and acquisitions to our portfolio on a quarterly basis.
In comparison to the same period last year, when net income equaled $179.7 million, or 42 cents per share, Conagra’s net income for the third quarter of 2018 increased to $362.8 million, or 91c per share on the common stock.The quarter’s sales increased by less than 1% to $1,994.5 million from $1,981.2 million in the same period last year.
In comparison to the same quarter last year, favorable selling, general, and administrative expenses, as well as favorable advertising and promotion expenses, are all responsible for the net income’s remarkable growth. The federal tax law implemented in December is also a contributing factor.
Conagra’s gross profit for the quarter dropped to $599 million, a 3.6% decrease.Chief financial officer David S. Marberger stated, “…a number of factors, including our deliberate decisions on how to invest in the top line, affected gross profit this quarter.” “We decreased A&P investments and kept our brand-building efforts concentrated on above-the-line marketing initiatives with retailers. Gross margin was impacted by this. We also observed financial difficulties. Although the results of our primary productivity initiatives persisted, they were more than outweighed by substantial transportation-related input cost inflation during the quarter.
Cost inflation, according to Mr. Connolly, should not have an effect on Conagra’s long-term margin forecast.He stated, “We don’t expect some of these transitory factors we’re dealing with right now to have an impact on our longer-term margin outlook.” Of course, inflation, productivity, and pricing are currently hot topics in our sector.
Inflation occurs, of course. It is a reality of life, and we see it as our responsibility to manage it as skillfully as we can in order to safeguard our margins. Two important levers that we have great expertise around are productivity and pricing. This is not to say that there won’t be short-term volatility, especially if you happen to be in a window where commodities inflation turns from mild to severe.
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Sales in Grocery & Snacks, the company’s main business area, decreased 1% to $838 million during the course of the quarter. The company reports that non-promoted consumption exceeded expectations and that consumption trends improved during the quarter. Volume fell 4% as a result of retailer inventory reductions that were greater than expected and intentional measures to improve distribution on some products with lesser margins.
Given the impact of the hurricanes in Q2, we projected this segment’s revenues to decline in Q3, Mr. Connolly stated. “We’re happy with the underlying consumption trends in our Grocery & Snacks portfolio, which bodes well for this segment’s long-term, top line growth prospects, even though it’s still early days.
From here on, we want to pick up speed, paying special attention to snacking. We’re reviving our snacking strategy with increased innovation, an emphasis on promoting impulse buys, purpose-driven marketing, and improved price pack design.
During the quarter, Conagra’s Refrigerated & Frozen business unit saw a little increase in sales, reaching $689 million. According to the corporation, innovation launches and core business enhancements in the Marie Callender’s, Healthy Choice, and Banquet businesses drove 3% increase in organic net sales, trailing 2% growth in volume.
According to Mr. Connolly, “frozen retail sales have improved materially.” “The quarter saw a nice increase in frozen food consumption, maintaining a positive trend in the industry. And although dollar sales have increased in tandem with our improving distribution performance, we believe we still have a long way to go.
From a broader perspective, one of our top priorities in frozen is to make sure we have enough area to take up our fair portion of shelf space and develop naturally, especially considering our excellent performance to date. As we receive our fair part of distribution, we anticipate that this will be a positive development for our frozen company in the future. The progress we’ve made in frozen shows that our strategy is effective and that we’re not content with our current state of accomplishments.
Conagra, according to Mr. Marberger, increased its expectations for its diluted earnings per share from continuing operations from the range of $1.95 to $2.02 management disclosed during its presentation at the Consumer Analyst Group of New York conference to $2.03 to $2.05 for the year.