Sales fell 1.4% as volumes declined. The company moved its cost-inflation outlook to the top of its range on freight and fuel, and is raising prices on frozen and refrigerated foods.
Conagra Brands earned more in its latest quarter while selling less, and its operations used more cash than they brought in.
The packaged-food company reported adjusted earnings of 41 cents a share for its fiscal first quarter, which ended Aug. 30, up 5.1% from a year earlier and 10 cents above the 31-cent estimate. GAAP earnings were 36 cents, up 5.9%, and net income rose 6.0% to $174.3 million.
Net sales fell 1.4% to about $2.60 billion. Organic sales, which exclude currency and acquisitions, dropped 1.1%, as a 2.1% decline in volume outweighed a 1.0% gain from price and mix. In the grocery and snacks segment, organic sales fell 2.0% on a 5.4% volume decline. Adjusted operating margin was 11.5%, or 10.3% as reported.
Chief Executive John Brase described "top line results largely in line with expectations and profit ahead of expectations amid a challenging operating environment."
The shares fell about 3% to near $13.70.
Cash and debt
Operating cash flow was negative $4.2 million in the quarter, compared with positive $120.6 million a year earlier. Conagra attributed the swing to lower operating profit and higher litigation payments. Net debt stood at $7.4 billion, with net leverage of 3.99 times.
Costs and prices
Costs are moving the wrong way. Transportation is the newest pressure point, and management blamed fuel, logistics and a scarcity of truck drivers for moving full-year cost inflation to the top of its 5% to 6% range. Shoppers will see the response on refrigerated and frozen products, which are getting price increases. Canned goods went first, repriced earlier to cover steel tariffs.
The full-year outlook was reaffirmed: organic sales down 1% to 3%, adjusted operating margin of 10.0% to 10.5%, and adjusted earnings of $1.40 to $1.50 a share. First-quarter adjusted earnings of 41 cents equal about 27% to 29% of that range.
Two readings
One reading is that Conagra is managing a shrinking top line well. Profit rose, the full-year outlook held despite higher costs, and at about $13.70 the stock trades at roughly 9 to 10 times the company's earnings target.
The other reading is that the quarter relied on pricing and cost cuts that get harder from here. Volume fell overall and by more than 5% in grocery and snacks, new price increases arrive just as freight costs climb, and a quarter of negative operating cash flow leaves less room with leverage near four times.
What to watch
How shoppers respond to the new frozen and refrigerated prices will show up in second-quarter volumes. Cash flow over the rest of the year will show whether the first-quarter shortfall was timing or trend.