Time for some margin expansion. Conagra Brands starts 2023 off hot.
After COVID-19 compressed margins, Conagra Brands and other packaged food companies are ready to roar back with a vengeance.
Conagra Brands, which owns frozen meal mainstays Hungry Man and Birds Eye, posted incredible earnings—in what could be a common theme for American food processors.
What to know
Inflation sent a shockwave through the American food industry. Most food manufacturers were able to pass most of the added costs through to American consumers. The thing about list price increases is that they don't happen all at once. There's a lag between rising input costs and price increases. The lag is now benefitting major food manufacturers. "It's the first quarter where we've actually seen the flip," CFO David Marberger told investors. "That's when you see the margin recover."
In the second quarter (for Conagra, that's the 13 weeks ending on November 27), the company saw inflation stabilize around 11%, while list prices increased by 17%.
It's fair to say that most major American food manufacturers may find themselves in the same situation.
Price increases refer to raising list prices (the price retailers purchase goods). It's one of many levers that consumer goods companies use to raise prices.
Conagra Brands boosted sales and increased margins.
For Q2 2023, Conagra recorded $3.3 billion in sales, an increase of over eight percent from the previous year.
Adjusted gross margin expanded 310 basis points to 28.2%; operating margin moved from under 15% to 17%.
Management felt confident enough to up its yearly organic sales growth forecast from 5% to 8%.
Price increases are only part of the equation.
In a span of five years, management sold off its low-margin businesses and completely revamped the frozen food space.
Here's a partial list of divestitures:
Peter Pan Peanut Butter for $101 million.
Egg Beaters for $51 million
Frozen Bagel franchise for $33.2 million
Frozen Pasta for $80m
Spun off its French Fry division to create Lamb Wesson.
Meanwhile, it acquired:
Pinnacle Foods (frozen produce) for $10 billion.
Angie's Boom Chicka Pop for $250m.
At the same time, the company invested in premium frozen foods--significantly boosting ticket price. Banquet went from $1.03 a unit; to $2.88! Now, it owns a number of premium brands in categories with minimal private label competition.