Executive Summary / Key Takeaways

• Conagra Brands (NYSE:CAG) is actively reshaping its portfolio and investing in core brands, particularly in Frozen and Snacks, to drive volume recovery and long-term value creation in a challenging consumer and cost environment.
• Despite recent operational disruptions and persistent input cost inflation (forecasted near 4% for FY25) and unfavorable foreign exchange, the company is prioritizing brand momentum and expects sequential volume improvement through fiscal 2025.
• Supply chain productivity initiatives remain a key lever, on track to deliver $1 billion in savings by the end of fiscal 2025, helping to offset costs and fund strategic investments.
• Fiscal 2025 guidance has been updated, reflecting higher expected inflation and FX headwinds, with adjusted EPS now projected between $2.45 and $2.50 and organic net sales near the midpoint of down 1.5% to flat.
• The company is committed to debt reduction, targeting a 3.0x net leverage ratio by the end of fiscal 2026, supported by strong free cash flow generation (expected >100% conversion in FY25), while managing risks from global trade policies and consumer spending pressures.

Setting the Scene: A CPG Giant's Strategic Evolution

Conagra Brands (NYSE:CAG), a North American branded food company with a history spanning over a century, stands at a pivotal point in its evolution. Known for a diverse portfolio including household names like Birds Eye, Slim Jim, and Marie Callender's, Conagra operates across key segments: Grocery Snacks, Refrigerated Frozen, International, and Foodservice. The company's journey has involved significant portfolio transformation over the past decade, including managing legacy legal and environmental liabilities stemming from historical acquisitions like Beatrice Company in 1991.

In recent years, Conagra's primary focus shifted to debt reduction. However, recognizing the dynamic nature of consumer tastes and the competitive landscape, the company has strategically resumed active portfolio reshaping. This involves a dual approach of targeted bolt-on acquisitions in high-growth, high-margin areas and the divestiture of lower-growth businesses. This strategy is designed to enhance the portfolio's growth profile and margin potential while remaining committed to achieving a long-term net leverage target of 3.0x by the end of fiscal 2026.

The competitive landscape in the consumer packaged goods (CPG) food industry is intense, populated by large, diversified players like General Mills (GIS), Kraft Heinz (KHC), and Campbell Soup Company (CPB), alongside numerous smaller and niche competitors. Conagra positions itself with a broad market appeal, leveraging its well-established brands and extensive distribution network across retail and foodservice channels. While precise, directly comparable market share figures for all niche competitors are challenging to ascertain, Conagra holds a significant presence, estimated at 8-10% in its primary North American CPG segments.

Conagra's competitive strengths lie in its strong brand equity, its focus on cost leadership, and its robust distribution capabilities. These factors contribute to pricing power and customer loyalty, providing a buffer in price-sensitive markets. However, the company faces vulnerabilities, including technological gaps in some production processes and potential impacts from high customer concentration with major retailers.

Central to Conagra's operational strategy is its focus on supply chain efficiency and modernization, which can be viewed as a form of operational technology differentiation. The company has set an ambitious target of achieving $1 billion in cost savings through productivity initiatives by the end of fiscal 2025. These initiatives, which yielded approximately 4% cost savings as a percentage of cost of goods sold in the fourth quarter of fiscal 2024, are crucial for offsetting input cost inflation and funding strategic investments in brands and innovation. The company has also demonstrated strong operational execution, maintaining service levels near pre-COVID levels of 97% in the first quarter of fiscal 2025 and improving its cash conversion cycle. Specific modernization efforts are underway, including a project at a frozen facility producing chicken components, estimated for completion by August. While not involving cutting-edge material science like some industries, these operational advancements provide tangible benefits through improved efficiency, reduced costs, and enhanced reliability, contributing to the company's competitive moat, particularly in maintaining cost leadership against rivals.

Segment Performance and Operational Realities

Conagra's performance across its four segments reflects the interplay of strategic investments, operational execution, and the prevailing macro environment.

The Grocery Snacks segment, primarily shelf-stable products, saw net sales decrease by 3.2% in the thirteen weeks ended February 23, 2025, and 0.9% in the first thirty-nine weeks, compared to the prior year periods. This decline was attributed to decreases in price/mix, influenced by increased strategic trade investments and changes in trade accrual estimates, alongside lower volumes. Acquisitions, such as Sweetwood Smoke Co., provided a partial offset. Operating profit for the segment decreased significantly in the third quarter, down 20.6%, driven by lower sales, input cost inflation, and unfavorable operating leverage, partially mitigated by productivity gains.

The Refrigerated Frozen segment, encompassing temperature-controlled products, experienced a 7.2% net sales decline in the third quarter and a 4.1% decline year-to-date. This segment was particularly impacted by decreases in price/mix due to strategic trade investments and volume declines, exacerbated by specific supply constraints affecting frozen meals containing chicken and frozen vegetable products in the third quarter. Temporary manufacturing disruptions at the Hebrew National plant also negatively impacted sales in the first three quarters of fiscal 2025. The segment's operating profit saw a substantial decrease of 52.5% in the third quarter, reflecting the sales declines, inflation, and unfavorable operating leverage. Manufacturing challenges at a key chicken facility led to increased costs from third-party manufacturers and abnormal inventory.

The International segment's net sales decreased by 17.6% in the third quarter and 10.5% year-to-date, primarily due to unfavorable foreign exchange rates, particularly the devaluation of the Mexican Peso, and lower volumes. The divestiture of the Agro Tech Foods Limited (ATFL) business in the first quarter of fiscal 2025 also impacted year-over-year comparisons. Despite the sales decline in Q3, year-to-date operating profit for the segment increased significantly (49.8%), benefiting from the divestiture of the lower-margin ATFL business, although a loss on the sale was recognized.

The Foodservice segment, serving restaurants and other establishments, saw net sales decrease by 6.1% in the third quarter and 4.9% year-to-date. This was driven by volume declines resulting from ongoing softness in restaurant traffic and lost business, partially offset by price/mix increases reflecting inflation-driven pricing. The Hebrew National disruption also had a minor impact on Foodservice sales year-to-date. Operating profit decreased by 19.2% in the third quarter, pressured by the sales declines, inflation, and unfavorable operating leverage, despite the segment having successfully restored margins to fiscal 2019 levels in the prior year through a value-over-volume strategy and exiting less profitable business.

Overall, while the second quarter of fiscal 2025 showed a return to volume and organic net sales growth driven by the domestic retail business, the third quarter faced renewed pressure. Management has acknowledged these challenges, particularly the operational disruptions and the impact of strategic trade investments on price/mix, but remains focused on driving sequential volume improvement and leveraging productivity gains to mitigate cost pressures.

Financial Health and Capital Allocation

Conagra's financial performance in the first three quarters of fiscal 2025 reflects the dynamic operating environment and the strategic choices made. Net sales for the thirty-nine weeks ended February 23, 2025, totaled $8,831.0 million, down 3.4% from $9,145.0 million in the prior year period. Total operating profit decreased by 17.4% to $1,361.3 million from $1,647.4 million. Adjusted operating margin for the first three quarters was 15.4%, down from 18.0% in the prior year, influenced by lower organic net sales, increased merchandising investments, and higher cost of goods sold inflation, partially offset by productivity.

Despite the pressure on operating profit, Conagra has demonstrated strong cash flow generation. Net cash flows from operating activities totaled $1.35 billion in the first three quarters of fiscal 2025, compared to $1.53 billion in the prior year. While lower operating profits and reduced dividends from the Ardent Mills joint venture contributed to the decrease, the company benefited from the accelerated receipt of outstanding receivables through customer payment term offerings, which boosted operating cash flow by approximately $147.0 million year-to-date. Operating cash flows also saw a benefit from lower tax payments due to reduced taxable income and favorable interactions with the IRS.

Cash used in investing activities increased to $457.2 million year-to-date, reflecting capital expenditures of $304.2 million and acquisitions totaling $230.6 million (net of cash acquired), partially offset by $76.8 million in net proceeds from the ATFL divestiture. Capital expenditures for the full fiscal year 2025 are estimated at approximately $410.0 million, a reduction from prior estimates due to timing shifts into the next fiscal year.

Cash used in financing activities was $914.3 million year-to-date, primarily driven by long-term debt repayments ($274.8 million), net short-term borrowing repayments ($52.6 million), and cash dividends paid ($502.2 million). The company also repurchased $64.0 million of common stock in the first quarter, with a remaining authorization of $852.6 million as of February 23, 2025.

Conagra maintains a prudent capital structure with a focus on debt reduction. As of February 23, 2025, total debt (including current installments) was $7.27 billion. The company was in compliance with all financial covenants under its revolving credit facility, which requires an EBITDA to interest expense ratio of not less than 3.0x and a funded net debt to EBITDA ratio not exceeding 4.5x. Management remains committed to achieving a net leverage ratio of 3.0x by the end of fiscal 2026, supported by expected strong free cash flow generation, with a fiscal 2025 free cash flow conversion rate expected to be greater than 100%. The company's investment-grade credit ratings provide access to capital markets and its revolving credit facility serves as a back-up for its commercial paper program.

Competitive Dynamics and Strategic Positioning

Conagra operates in a highly competitive environment where scale, brand equity, cost efficiency, and innovation are critical. Compared to peers like General Mills (GIS), Kraft Heinz (KHC), and Campbell Soup Company (CPB), Conagra exhibits distinct characteristics.

Financially, Conagra's latest TTM gross profit margin of 26.42% trails General Mills (GIS) (35%), Kraft Heinz (KHC) (35%), and Campbell Soup Company (CPB) (31%). Similarly, its TTM operating profit margin of 4.39% is significantly lower than General Mills (GIS) (17%), Kraft Heinz (KHC) (7%), and Campbell Soup Company (CPB) (10%). This suggests that while Conagra has strengths in cost efficiency within its supply chain, its overall profitability is impacted by factors such as strategic trade investments, operational disruptions, and potentially different product mix or pricing strategies compared to peers. Conagra's TTM Net Profit Margin is also lower at 2.80% compared to General Mills (GIS) (13%), Kraft Heinz (KHC) (11%), and Campbell Soup Company (CPB) (6%).

However, Conagra's strategic emphasis on volume recovery and market share gains, particularly in Frozen and Snacks, has shown traction. Management highlighted that 67% of Conagra's portfolio held or gained volume share in Q2 FY25, outpacing its near-in peer set and specifically outperforming its closest peer by 24 percentage points. This share performance was even stronger in the strategic Frozen and Snacks domains, with 87% of brands holding or gaining share in Q2. This indicates that Conagra's investments in brand building and targeted promotions are resonating with consumers, even if they pressure short-term margins.

Conagra's operational technology focus, aimed at driving productivity and cost savings, is a key competitive lever. The target of 4% cost savings as a percentage of COGS is a significant factor in offsetting inflation, which management noted is still around 4% in Q3 FY25. While peers also pursue productivity, Conagra's ability to achieve these targets is crucial for maintaining its cost position.

The company's portfolio reshaping efforts, such as the acquisition of Sweetwood Smoke Co. to bolster its position in the high-growth meat sticks category and the divestiture of lower-growth assets like ATFL and the planned sale of Chef Boyardee, are strategic moves aimed at improving the overall growth and margin profile of the business. This active management of the portfolio is a response to evolving consumer preferences and competitive pressures, allowing Conagra to focus resources on areas with higher potential.

Conagra's competitive position is also influenced by customer and supplier dynamics. Dependency on major retailers, while providing broad reach, can expose the company to pricing and trade investment pressures. Managing these relationships effectively is key. On the supply side, vulnerability to commodity price fluctuations and potential impacts from global trade policies, such as tariffs on key inputs like tin plate steel or palm oil, are significant risks that require agile sourcing and pricing strategies.

In summary, Conagra is actively competing by investing in its brands and operations to drive volume and gain share, particularly in strategic segments. While its current profitability margins lag some peers, its focus on cost efficiency, portfolio optimization, and direct consumer engagement through targeted investments are central to its strategy for long-term competitive strength and value creation.

Outlook and the Path Forward

Conagra's outlook for fiscal 2025, as updated in the second quarter, reflects a realistic assessment of the persistent macroeconomic challenges while maintaining a commitment to strategic priorities. The company now expects organic net sales to be near the midpoint of its previously guided range of down 1.5% to flat compared to fiscal 2024.

The adjusted operating margin is projected to be approximately 14.8% for the full fiscal year. This updated margin outlook is primarily driven by higher-than-expected cost of goods sold inflation, which is now forecast to be closer to 4% for the year, up from the initial estimate of approximately 3%. Management noted that the anticipated moderation in animal protein and egg costs has been delayed until fiscal 2026. This higher inflation is expected to result in a full-year fiscal 2025 gross margin contraction of roughly 90 basis points compared to the prior year.

Adjusted EPS for fiscal 2025 is expected to be in the range of $2.45 to $2.50. This revised EPS guidance incorporates the impact of the updated operating margin outlook, along with an estimated $0.04 per share headwind from unfavorable foreign exchange rates due to the forecasted continued strength of the U.S. dollar.

Despite these headwinds, Conagra is maintaining its commitment to brand-building investments in the second half of the year, prioritizing continued momentum with the consumer. Limited new pricing actions are planned only in specific areas like cocoa and sugar to help offset rising costs. The company expects second-half volumes and organic net sales to improve compared to the first half, although the timing of investments may lead to non-linear progress.

Looking ahead to fiscal 2026, management has indicated that while they expect some deflation on crop-based inputs and a delay in protein cost relief until after the end of fiscal 2025, the environment remains dynamic. External factors such as inflation, potential tariffs, and consumer sentiment are being closely monitored, and the company will assess where the "dust settles" before providing formal guidance in July. Navigating these factors will likely require leveraging all available tools, including productivity, alternative sourcing, and pricing actions.

Conagra remains focused on generating strong free cash flow, with a fiscal 2025 conversion rate expected to exceed 100%. This strong cash flow supports the company's priority of debt reduction, reinforcing its path towards the 3.0x net leverage target by the end of fiscal 2026. The company also continues to support its dividend, targeting a payout ratio around 53% of the midpoint of its fiscal 2025 adjusted EPS guidance.

Key Risks and Investor Considerations

Investing in Conagra Brands (NYSE:CAG) involves considering several key risks that could impact its financial performance and the realization of its strategic objectives.

Macroeconomic conditions pose a significant risk. Persistent high inflation, reduced consumer confidence and spending, and potential recessionary pressures can negatively impact consumer purchasing power and demand for Conagra's products, potentially leading to continued volume pressure or the need for increased promotional activity that erodes margins. Rapid changes in global trade policies, including announced and potential additional tariff increases on key inputs, could exacerbate input cost inflation beyond current forecasts, further pressuring profitability if not fully offset by pricing or productivity.

Supply chain challenges and commodity cost volatility remain pertinent risks. Disruptions in the supply chain, as experienced with the Hebrew National and frozen chicken production facilities in fiscal 2025, can lead to lost sales, increased manufacturing costs, and abnormal inventory levels. Volatility in the prices of raw materials, packaging, energy, and transportation can impact cost of goods sold and gross margins. While Conagra uses hedging activities, these may not fully mitigate the impact of significant price swings.

Operational execution risks include the successful implementation of productivity initiatives and the modernization of manufacturing facilities. Delays or cost overruns in these projects could impact the ability to achieve targeted cost savings and maintain efficient operations. The effectiveness of brand-building investments and innovation in driving sustained volume recovery and market share gains is also subject to consumer response and competitive actions.

Legacy legal and environmental matters, while management believes their ultimate resolution should not have a material adverse effect, carry the risk of changes in estimates or unfavorable outcomes that could result in material liabilities. The significant increase in the accrual for litigation matters in fiscal 2025 highlights the ongoing nature of these risks.

Finally, foreign exchange rate fluctuations can negatively impact the reported results of the International segment and consolidated earnings, as seen with the devaluation of the Mexican Peso. While Conagra may use derivatives to mitigate some FX risk, significant currency movements can still create headwinds.

Investors should monitor Conagra's ability to effectively manage these risks, particularly the interplay between inflation, consumer demand, and the effectiveness of its pricing and investment strategies, as these will be critical determinants of its financial performance and progress towards its leverage target.

Conclusion

Conagra Brands (NYSE:CAG) is navigating a complex operating environment marked by persistent inflation, cautious consumers, and operational challenges. The company's strategic pivot towards active portfolio reshaping and focused investments in its core Frozen and Snacks domains is a clear response aimed at driving volume recovery and enhancing long-term value. While recent financial results, particularly in the third quarter of fiscal 2025, reflect the pressures of this environment and specific operational disruptions, management's commitment to brand momentum and leveraging supply chain productivity remains central to the path forward.

The updated fiscal 2025 guidance signals continued near-term headwinds, notably from higher inflation and unfavorable foreign exchange. However, the expectation for sequential volume improvement and strong free cash flow generation underscores the underlying resilience of the business and its ability to fund strategic initiatives and prioritize debt reduction. Conagra's competitive standing relies on its ability to effectively deploy its operational technology for cost efficiency, leverage its strong brand portfolio, and adapt its product mix through portfolio optimization in response to evolving consumer preferences and competitive dynamics. The successful execution of its productivity targets and the resolution of operational issues will be key factors in improving profitability and achieving its leverage goal by the end of fiscal 2026. While risks persist, the company's strategic focus and demonstrated cash flow generation provide a foundation for navigating the current challenges and pursuing its long-term objectives.