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Conagra Brands Inc CAG

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Although Inflation Strains Near-Term Margins, Improved Brand Performance Makes Conagra Compelling

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.

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Company Profile

Business Description

Conagra Brands is a packaged food company that operates predominantly in the United States (over 90% of revenue and profits). It has a significant presence in the freezer aisle, with brands such as Marie Callender’s, Healthy Choice, Banquet, and Birds Eye. Other popular brands include Duncan Hines, Hunt’s, Slim Jim, Vlasic, Orville Redenbacher's, Reddi-Wip, Wish-Bone and Chef Boyardee. While the majority of revenue is sold into the U.S. retail channel, 7% of fiscal 2021 sales were to the food-service channel, down from 11% in fiscal 2019 due to the pandemic.

222 W. Merchandise Mart Plaza, Suite 1300
Chicago, IL, 60654
T +1 312 549-5000
Sector Consumer Defensive
Industry Packaged Foods
Most Recent Earnings May 31, 2021
Fiscal Year End May 31, 2022
Stock Type High Yield
Employees 18,600


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