Conagra Earnings: Macro Headwinds Weigh on Top-Line Growth, but Profitability Remains Strong

No-moat Conagra CAG reported a slow start to fiscal 2024, with first-quarter organic net sales down 0.3% over the prior year. Still, the company had been guiding to a much slower top line for 2024, so the results were not entirely surprising. However, we are likely to reduce our fair value estimate of $45.50 per share, as demand recovery might take longer than we previously thought.

On the positive side, profitability improved, with first-quarter adjusted operating margins of 16.7%, a nearly 300-basis-point gain over 2023. This isn’t unexpected given previous robust price increases to offset inflation, though we anticipate some increased promotional spending may offset some margin improvement going forward as companies compete for a stretched consumer wallet.

Conagra reiterated its full-year 2024 guidance, including 1% of organic net sales growth, adjusted operating margin of 16%- 16.5%, and adjusted EPS of $2.70-$2.75. The top-line target implies some acceleration for the next three quarters, which might be possible as price increases slow, and volumes stabilize. Overall, we view these targets as achievable.

Management discussed some near-term trends that it believes weighed on demand for its products, including a shift to more hands-on prep over convenience and more meals-for-many over individual meals. These hurt its frozen retail sales most, which were down 4% over the prior year. However, management argued that frozen remains an attractive space given 4% annual average growth over the past 40 years, much higher than most food categories. But that robust market growth has attracted a lot of competition. With relative underinvestment behind its brand, we think Conagra will struggle to build an advantage in the category.