Analyst Note| Rebecca Scheuneman, CFA |
No-moat Conagra exceeded our sales forecast once more, reporting a 10% drop in its fourth-quarter organic sales, topping our expectation for a 13% decline as it lapped last year’s 21.5% pandemic-driven surge. But this was overshadowed by cost inflation, which surged to 9% in July from 6% in April, causing Conagra’s fourth-quarter adjusted operating margin to fall 310 basis points to 14.0%, which contributed to a 17.5% adjusted operating margin for fiscal 2021, missing our 18.5% mark. As it takes about 90 days for Conagra to implement inflation-mitigating factors, such as price/mix adjustments and cost-savings programs, margins for the first half of fiscal 2022 are now expected to be lower than we initially forecast. But this should not prove material, as we expect it will be short-lived. We think Conagra’s price increases will successfully take hold, as peers are also raising prices. In fact, management said realized price elasticities are favorable in comparison to its estimates. While inflation can be unpredictable and further price escalation is a risk, we think this scenario would likely cause consumers to delay their return to restaurants to save money, providing an offsetting benefit for Conagra.