Did Conagra’s Margins Improve in Fiscal 1Q18?
Margins expanded despite challenges
Conagra Brands (CAG) managed to expand margins despite challenges. During the quarter, Conagra’s fiscal 1Q18 margins benefitted from its costs and productivity saving initiatives, which more than offset the negatives stemming from volume deleverage. Meanwhile, higher pricing and mix coupled with lower SG&A expenses further cushioned the margins.
However, lower sales, higher-than-expected inflation in commodity prices, and increased investments to support the launch of innovative products remained a drag and lowered the company’s margins expansion rates.
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In comparison, General Mills’ (GIS) fiscal 1Q18 margins took a hit from a decline in volumes and rising input costs. Similarly, J.M. Smucker’s margins contracted during the last reported quarter, reflecting rising input costs and decreased volumes.
However, other food majors including Hershey (HSY), Kellogg (K), and Kraft Heinz (KHC) have reported higher margins so far this year as increased cost savings more than offset the adverse impact of soft volumes.
1Q18 margin performance
Conagra Brands’ fiscal 1Q18 adjusted gross margin improved by 26 basis points to 29.2%. As expected, the rate of growth slowed down due to the higher input costs and increased investments in slotting fees. However, favorable pricing and mix, cutbacks on promotions, and discontinuation of low-margin businesses more than offset the negatives.
The adjusted operating margin expanded by 110 basis points to 16.5%, reflecting an expansion in gross margin and a decline in SG&A expenses.
Conagra’s management expects its adjusted operating margin to be in the range of 15.9%–16.3% in fiscal 2018, up about 10–50 basis points. Management stated that lower volumes, inflation in input costs, especially during the first half of fiscal 2018, and increased slotting fees would adversely impact its margins growth rate. However, focus on premiumization, trade productivity, and incremental cost savings will likely continue to drive margins.