Conagra Brands: Slower-Than-Expected Volume Recovery Hinders Q2 Results

Conagra Brands is rolling out its “biggest innovation slate yet” this year, alongside increased investments in advertising and merchandising in an effort to reverse volume declines amid continued weak consumer demand.

During its Q2 earnings call on Thursday, the Chicago-based maker of Slim Jim and Healthy Choice discussed plans to lure lapsed shoppers with new items such as Wendy’s branded canned chili, Birds Eye frozen fire-roasted corn and Orville Redenbacher’s popcorn seasonings, including co-branded offerings with Buffalo Wild Wings and Cinnabon.

“We are backing those launches with meaningful increases in slotting, in-store and other sales support versus the prior year,” said Sean Connolly, president and CEO.

A partnership with World Wrestling Entertainment is expected to lift Slim Jim sales.

“We have a robust and multifaceted investment plan in place for the second half of the year, reflecting our confidence in consumer responsiveness to our brand building efforts,” Connolly said.

Net sales in Q2 decreased 3.2% from the prior year to $3.2 billion, and organic net sales fell 3.4%, as “the consumer is still deploying some value-seeking tactics” at the grocery store, Connolly said.

“We saw some consumers looking to alternatives such as multiserve meals and scratch cooking to stretch their budgets,” Connolly said, noting the “pace of the shift back to normal consumer behavior has been slower than we initially expected” but added “the tide appears to be turning.”

During the quarter, Refrigerated & Frozen segment net sales declined 5.8%; however, Conagra gained dollar share in frozen side dishes and gained unit share in frozen single-serve meals. Segment operating profit fell 12%.

Investments in merchandising and brand building activities during the quarter drove meaningful progress in the company’s frozen business, Connolly said, noting Refrigerated & Frozen segment volume “went from minus 10.5% in the first quarter to minus 3.3% in the second quarter, coming in line with volumes in Grocery & Snacks.”

“We are seeing clear progress when it comes to volume recovery,” he added. “In Q2, that progress was most notable in our Refrigerated & Frozen segment, in particular, our frozen business. This inflection was helped by investments on key brands, as we were seeking to understand consumer readiness to revert back to more typical purchase behaviors.”

Grocery & Snacks segment net sales decreased 4.1% in the quarter, primarily driven by lower consumption trends, though the company gained dollar share in microwave popcorn, seeds, chili and hot cocoa. Operating profit for the segment decreased 18%.

International segment sales increased 8.1%, with organic net sales up 5.6%, reflecting a strong performance in the company’s Mexico business. Operating profit decreased 84% due to an impairment charge.

Foodservice segment sales climbed 4.3% behind strategic pricing actions. Volume declined 2.5%.

Overall, second-quarter operating margin was 14%, marking a 261-basis-point decrease from the comparable period. Adjusted operating margin fell 108 basis points to 15.9%.

Diluted EPS was $0.60, down 24.1% from a year ago, and adjusted EPS declined 12.3% to $0.71.

The company adjusted its full-year guidance and now expects organic net sales to decrease between 1% and 2% versus FY 2023 (downgraded from the previously guided approximate 1% increase), adjusted operating margin of approximately 15.6% (down from 16% to $16.5), and adjusted EPS between $2.60 and $2.65 (down from $2.70 to $2.75).