CHICAGO – The rapid rise in the costs of edible fats and oils, proteins, packaging and transportation, and the lag between when Conagra Brands, Inc. was able to respond to the inflation has forced the company to lower its outlook for fiscal 2022.
“Due to the timing lag between when this inflation hits our P&L and when the benefits of our pricing and productivity actions take effect, we do not expect to fully offset the impact of these cost increases in time to meet our prior fiscal '22 EPS projections,” said David S. Marberger, chief financial officer, during a July 13 conference call with analysts to discuss fiscal 2021 results. “We do expect, however, second-half fiscal '22 EPS to be in line with what we assumed for the second half in our prior guidance.”
Conagra Brands had guided fiscal 2022 earnings per share to be in a range of $2.63 to $2.73, but now expects EPS to be closer to $2.50 per share.
Mr. Marberger said the continued acceleration of costs was the biggest driver of the change in the company’s guidance. Conagra management initially assumed the annual inflation rate would be about 3%. The company updated its guidance in April 2021, saying it expected to experience 6% inflation during the year.
“We now currently expect fiscal '22 inflation to come in around 9%,” Mr. Marberger said. “The difference between the 6% we expected a few months ago and the 9% we expect today equates to approximately $255 million in additional costs during fiscal '22.”
Sean M. Connolly, president and chief executive officer, said there are a variety of reasons for the lag from when prices rise to when companies can adjust.
“First, you don’t generally get a customer to accept inflation-justified pricing until they're confident it's not transitory inflation,” he said. “So, it’s not the day it shows up. It’s after it’s clearly established. Once that happens, it’s around 90 days before you see the impact in the P&L. And then, if inflation keeps moving, and this is what we’ve been dealing with, you take additional waves of action and the clock starts over.”
Mr. Connolly called the situation “temporary” and added, “Now we’ve got inflation.”
“It happens,” he said. “You deal with it, and we are. The team is taking, in my judgment, all the right actions. And the portfolio, importantly, is better positioned to navigate this dynamic than it was previously in the years gone by.”
The strength of Conagra Brands’ portfolio and its performance during the pandemic was reflected in the company’s fiscal 2021 results. Net income for the year ended May 30 was $1.3 billion, equal to $2.67 per share on the common stock, and an increase of 55% over the previous year when the company earned $840 million, equal to $1.72 per share.
Sales for the year rose 1% to $11.2 billion.
“We delivered strong growth for the full fiscal year, including a 5.1% increase in organic net sales; adjusted operating profit of nearly $2 billion, up 7.4% versus fiscal '20; and operating margin of 17.5% for the year, an increase of more than 100 basis points versus fiscal ‘20; an adjusted EBITDA increase of 6.5%; and adjusted EPS growth of 15.8% for the year,” Mr. Marberger said.
Despite the inflationary pressures, Mr. Connolly said Conagra Brands sees opportunity ahead in fiscal 2022.
“We have a unique opportunity in fiscal '22 to leverage our current momentum and maximize long-term value-creation potential,” he said. “New behaviors and habits created during the pandemic resulted in an elevated and sustained level of at-home eating. Shoppers are engaging or reengaging with our products now more than ever, creating a larger, high-quality consumer base.
“To sustain this engagement, we plan to continue making investments in the physical and mental availability for our products. This includes building additional capacity to fulfill consumer demand making further strategic e-commerce investments, pursuing efficient and thoughtful marketing campaigns and introducing a robust fiscal '22 innovation slate.”
New products on tap during the coming year include Hungry Man Double Chicken Bowls, Birds Eye Sheet Pan Meals, Marie Callender’s chicken pot pies with a cauliflower crust, Gardein plant-based chili and P.F. Chang’s salad dressings and cooking sauces.
“We’re confident that the investments we’re making in product innovations across our portfolio will produce strong ROIs,” Mr. Connolly said. “Ultimately, long-term brand health is dependent on the type of perpetual modernization that we're committed to here at Conagra.”