Shares of Conagra Brands Inc. shot up toward a multiyear high Thursday, after the branded foods company said price hikes had finally caught up to cost inflation, leading to a big jump in margins and a big profit beat.
Chief Executive Sean Connolly said on the fiscal second-quarter earnings call with analysts that the company had reached in the previous quarter “a significant inflection point” in the relationship between sales and the cost of goods sold (COGS), in which the margin story flipped from compression to recovery.
The stock
CAG,
ran up 2.7% in afternoon trading, putting it on track for the highest close since June 2017.
The company, with brands including Birds Eye, Healthy Choice, Slim Jim and Reddi-wip, reported earlier Thursday fiscal second-quarter sales that rose 8.3% from a year ago to $3.31 billion, as a 17% jump in pricing was partially offset by an 8.4% decline in volume. Meanwhile, COGS increased just 3.8% to $2.39 billion, compared with 10.3% COGS growth in the first quarter.
Conagra Brands Inc.
That helped boost adjusted gross margin for the quarter to 28.2%, up from 24.9% in the first quarter.
“Now predictably, as pricing has finally caught up to COGS inflation, you can see the recovery of our gross margin to be more in line with pre-pandemic levels,” Connolly said, according to a FactSet transcript.
Conagra Brands Inc.
“While our gross margin can vary quarter-to-quarter, due to a range of internal and external factors, the strategic pricing actions we have successfully executed, combined with moderating inflation and our strong brands position us well to recover and maintain a health gross margin going forward,” Connolly said.
The increased pricing did hurt volumes, the negative effects have faded as elasticities, or how much demand is affected by higher prices, have remained little changed over the past few quarters.
(Source: IRI POS and IRI Price Elasticity, Total US-MULO+C, Edible xBeverage, Rolling 52 Week-Periods Ended November 27, 2022)
Conagra Brands Inc.
The raised pricing and improved margins helped boost net income for the quarter to Nov. 27 to $381.9 million, or 79 cents a share, from $275.5 million, or 57 cents a share, in the same period a year ago.
Excluding nonrecurring items, adjusted earnings per share of 81 cents beat the FactSet consensus of 66 cents.
Conagra also raised guidance ranges for its fiscal 2023 adjusted EPS growth to 10% to 14% from 1% to 5%.
The stock has run up 17.4% over the past three months, while the SPDR Consumer Staples Select Sector exchange-traded fund
XLP,
has gained 8% and the S&P 500 index
SPX,
has tacked on 1.2%.
This post was originally published on Market Watch
