CHICAGO — Improving profit margins are allowing executives of Conagra Brands, Inc. to reignite product innovation efforts.
Operating margin in the third quarter ended Feb. 26 increased 355 basis points to 15.9% while adjusted operating margin increased 321 basis points to 16.9%. Gross profit margin improved for a second straight quarter, said Sean M. Connolly, president and chief executive officer of the Chicago-based company.
“Again, this margin recovery was our top priority for the year,” he said in an April 5 earnings call. “Why? Because our gross margins fund our innovation program, and that innovation has been the centerpiece of our playbook and our success in driving sustained category growth in our two strategic focus areas: frozen and snacks. This recovery, therefore, means you should continue to expect a relentless stream of provocative innovation and brand-building support as we go forward.”
Net income attributable to Conagra Brands increased 56% in the quarter to $342 million, or 72¢ per share on the common stock, which compared with $218 million, or 45¢ per share, in the previous year’s third quarter.
Net sales increased 6% to $3.09 billion from $2.91 billion. Organic net sales rose 6%. A 15% improvement in price/mix came thanks to inflation-driven pricing actions. Volume decreased 9% driven by the elasticity impact of the pricing actions and supply chain disruptions.
“The modest elasticities, which are well below historic norms and have remained consistent in the face of our inflation-justified price increases, are a testament to the strength of our brands, the execution of our pricing strategy and the limited impact of private label competition,” Mr. Connolly said.
Conagra updated its guidance for the fiscal year. The company now expects organic net sales growth of 7% to 7.5%, adjusted operating margin between 15.5% and 15.6%, and adjusted EPS between $2.70 and $2.75. Previous guidance was 7% to 8% for organic net sales growth, 15.3% to 15.6% for adjusted operating margin, and $2.60 to $2.70 for adjusted EPS.
In the Grocery & Snacks segment, third-quarter net sales increased 3.7% to $1.24 billion. Manufacturing disruptions in certain categories led to products being out of stock.
“Most notably impacted were our canned meals and sides businesses, specifically canned pasta, canned beans, canned chili and canned meat, all part of our grocery portfolio,” Mr. Connolly said.
In the Refrigerated & Frozen segment, net sales increased 6% to $1.31 billion. Breakfast sausages and single-serve meals drove the growth, Mr. Connolly said.
“In Frozen, we had one noteworthy disruption as our fish business was on allocation, which led to out-of-stocks during the peak Lenten season,” Mr. Connolly said. “This was due to a fire on our fish frying line as reported in our second quarter 10-Q. While these discrete issues suppressed our volume in Q3, the root causes have been largely resolved, and we expect volumes to rebound sequentially from here.”
In the International segment, net sales increased 8% to $260 million. Net sales in Foodservice rose 17% to $275 million.
“So we’ve seen nice improvement in margins in Foodservice, but we still have some work to do to get back to the pre-COVID margin level,” said David S. Marberger, chief financial officer. “So another 200 to 300 basis points of improvement, and I'll be happier with the margins.”Through the first three quarters of the fiscal year Conagra Brands had net income of $646 million, or $1.35 per share on the common stock, which was down 11% from $729 million, or $1.52 per share, in the same time of the previous year. Net sales over the first three quarters increased 8% to $9.30 billion from $8.63 billion.