Conagra Brands Inc. says its meat snack and frozen food business is taking a hit from inflation, which is driving up protein, dairy and transportation costs.
brand lineup includes Banquet frozen meals, Gardein plant-based meat, and Slim Jim jerky.
“[T]his higher-than-expected inflation is disproportionately impacting some of our strongest businesses, including meat snacks and frozen,” said Sean Connolly, chief executive of the company, on the earnings call, according to a FactSet transcript.
“Keep in mind that these businesses rely on inputs like protein and dairy, which are harder to offset in the short term, and that frozen requires more specialized temperature control transportation.”
Price hikes targeting these two categories are coming in the fiscal first-quarter of 2023, which starts in June.
Conagra reported fiscal third-quarter earnings on Thursday. Profit was in line with Street expectations and sales exceeded consensus. However, profit guidance was below expectations.
“We expect many food peers to run a similar playbook in the upcoming CY 1Q earnings season,” wrote UBS analysts in a note. The question, they say, is pricing power.
“Conagra historically registers below average, evidenced by the company’s lower gross margin and reliance on promotions to maintain market share. On that note, we believe Conagra is caught between a rock and a hard place: invest behind its brands to maintain share or cut costs to drive bottom line growth.”
UBS rates Conagra shares neutral with a $34 price target.
Credit Suisse also reiterated its neutral rating at $34 price target
“By our reckoning, 20% of Conagra’s brands target lower income consumers who have the most to lose as government stimulus support from the pandemic wanes,” wrote Credit Suisse analysts in a note.
Lower-income shoppers are expected to trade down to value priced items in 2022. Bank of America analysts forecast a heavy impact from high gas prices on lower-income consumers as well.
“[L]lower income consumers tend to work in services sectors such as leisure and hospitality where remote working is not an option, suggesting their demand for gasoline should be inelastic to prices,” Bank of America wrote in a report published Friday.
Though the company is experiencing problems now, JPMorgan analysts say Conagra could see some relief before a lot of other businesses.
“A company whose COGS [cost of goods sold] are inherently harder to hedge (chicken, certain dairy items) will face inflation sooner than peers that are more tethered to corn, wheat, and other items with highly liquid futures markets,” analyst say.
“It’s therefore no shock that Conagra’s pricing should hit 10% sooner than most other companies we cover. It’s a painful problem now but the sooner it’s in the past the better, and as of now we model Conagra’s COGS increases peaking in fiscal 1H23. In fact, this may be slightly optimistic, but we forecast CAG’s gross margins increasing year-over-year in every quarter in fiscal 2023.”
JPMorgan rates Conagra stock neutral with a $36 price target.
Conagra stock has rallied 12% over the past month, and is down 7.2% over the last year. In comparison, the S&P 500 index
has gained 7.9% the past month and has advanced 9.8% the past year.