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Conagra’s Margins Will Likely Improve at a Slower Rate

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Conagra’s margins

Conagra Brands (CAG) managed to report strong margin improvement despite lower sales. During fiscal 2017, the company’s adjusted gross margin expanded by 180 basis points to 30.2%. Meanwhile, the adjusted operating margin expanded by 310 basis points to 15.8%. Conagra’s planned divestiture of low-margin bands, price restructuring, focus on reducing costs, and supply-chain productivity helped the company report higher margins despite sales deleverage.

Notably, Conagra Brands generated an improvement of more than 300 basis points in its operating margins in the first three quarters of fiscal 2017. However, the growth slowed during the fourth quarter—the operating margins improved by 100 basis points.

General Mills (GIS), Kraft Heinz (KHC), and Kellogg (K) also managed to expand their margins despite lower sales.

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Slower growth rate

The company’s focus on high-margin products, premiumization, SKU rationalization, and cost reduction will likely drive its profitability in fiscal 2018. Management projects that the adjusted operating margin will be 15.9%–16.3%, which reflects a year-over-year improvement by 10 basis points–50 basis points in fiscal 2018. It’s below the operating margin expansion by 310 basis points that it reported in fiscal 2017.

The company’s investment in innovation, expected fall in its top line, increased input costs, and unfavorable mix will likely restrict the margins’ growth rate.

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