Why Conagra’s 2Q18 Margins Disappointed

Like most of its peers’ margins, Conagra Brands’ (CAG) margins remained pressured during fiscal 2Q18, despite higher sales. Increased input costs and higher brand investments weighed on the profitability of the company. The company’s margins benefited from higher volumes and supply-chain productivity savings in fiscal 2Q18. However, elevated costs remained a drag.

Conagra’s adjusted gross margin narrowed 101 basis points to 30.1% during 2Q18, as benefits from net sales growth and productivity savings were more than offset by higher-than-anticipated input cost inflation, increased transportation expenses related to this year’s hurricanes, and the company’s brand investments.

Other major US (SPY) food companies’ gross margins also remained pressured in their last reported quarter, reflecting increased input costs and higher transportation and logistics expenses. General Mills (GIS) marked a 240-basis-point contraction in its adjusted gross margin in fiscal 2Q18. Mondelēz (MDLZ), Hershey (HSY), Campbell Soup (CPB), and J.M. Smucker (SJM) also reported a YoY (year-over-year) gross profit margin contraction due to higher costs.

Conagra’s adjusted operating profit margin contracted 31 basis points to 16.7%, reflecting a narrower gross margin and a planned increase in selling, general, and administrative expenses. Increased marketing investments remained a drag during the quarter.

Given the margin pressure from input cost inflation, increased brand investments, and an anticipated rise in transportation expenses, Conagra now expects its adjusted operating margin to be at the low end of its projected range of 15.9% to 16.3%. The absence of hurricane-related sales could also weigh on its profitability during fiscal 3Q18.