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Conagra (CAG) Appears to be in Trouble on Cost Inflation

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Conagra Brands, Inc. (CAG - Free Report) appears to be in bad shape. The company has been struggling with elevated cost headwinds, which are likely to persist. While it is undertaking saving and pricing actions to counter cost inflation, gains from these initiatives are likely to take time before they are realized. Also, divestitures have been impacting Conagra’s sales performance.

Let’s delve deeper.

High Costs – a Key Concern

Of late, Conagra has been encountering cost of goods sold inflation. In the first quarter of fiscal 2021, gross profit declined 16.9% to $673 million, while adjusted gross profit fell 18.0% to $675 million. Gross margin contracted 486 basis points (bps) to 25.4% and adjusted gross margin declined 530 bps to 25.4%. The downside was the result of a decline in net sales, cost of goods sold inflation and loss related to Sold businesses. Adjusted EBITDA declined 22.6% to $501 million due to lower adjusted gross profit.

Management expects cost inflation of nearly 11% in fiscal 2022 compared with 9% predicted earlier. Although management is focused on undertaking relevant saving and pricing efforts to combat this inflation, the timing and gains from these initiatives are likely to be more skewed toward the second half of fiscal 2022. Apart from this, CAG’s brand-building investments might also impact the margins.

During the first quarter of fiscal 2022, SG&A expenses, including advertising and promotional (A&P) costs increased 3.3% to $310 million. A&P costs increased 35.3% to $62 million due to increased e-commerce investments. Management continues to expect SG&A expenses to impact the operating margins adversely.

Zacks Investment ResearchImage Source: Zacks Investment Research

Other Downsides

During the first quarter of fiscal 2022, Conagra’s net sales growth was affected by the divestiture of H.K. Anderson business, Peter Pan peanut butter business and Egg Beaters business. The divestitures are collectively referred to as Sold Businesses. During the first quarter, divestitures adversely impacted net sales by nearly 110 bps.

Net sales of $2,653.3 million decreased 1% year over year in the quarter. Organic net sales dropped 0.4% due to lower volumes to the tune of 2%. Volumes in most of the company’s segments were hurt by the tough comparisons with the year-ago period’s initial pandemic-led demand surge. Adjusted earnings came in at 50 cents, which dropped 28.6% year over year, mainly due to lower gross profit.

Shares of this Zacks Rank #4 (Sell) company have declined 2.4% in the past six months compared with the industry’s fall of 4.1%.

3 Consumer Staple Picks

Some top-ranked stocks from the Consumer Staples sector are MGP Ingredients (MGPI - Free Report) , The Hain Celestial Group (HAIN - Free Report) and Inter Parfums, Inc. (IPAR - Free Report) .

MGP Ingredients, the producer and supplier of distilled spirits, and specialty wheat proteins and starch food ingredients, currently sports a Zacks Rank #1 (Strong Buy). Shares of the company have rallied 31.8% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for MGP Ingredients’ current financial-year sales and earnings per share (EPS) suggests growth of 55.5% and 61.4%, respectively, from the year-ago period’s figures. MGPI has a trailing four-quarter earnings surprise of 117.6%, on average.

Inter Parfums develops, manufactures and distributes prestige perfumes and cosmetics. It currently sports a Zacks Rank #1. Inter Parfums has a trailing four-quarter earnings surprise of 29.7%, on average.

The Zacks Consensus Estimate for IPAR’s current financial-year sales and EPS suggests growth of 55.9% and 100%, respectively, from the year-ago period’s figures. Shares of the company have surged 31.4% in the past six months.

The Hain Celestial, which provides various natural and organic foods as well as personal care products in North America and Europe, carries a Zacks Rank #2 (Buy) at present. It has a trailing four-quarter earnings surprise of 9.7%, on average. Shares of The Hain Celestial have moved up 2.2% in the past six months.

The Zacks Consensus Estimate for HAlN’s current financial-year EPS suggests growth of 14.5% from the year-ago period’s reported number.