The coronavirus pandemic changed society in significant ways, but only temporarily in many cases. However, even after several years, the effects of that global event are still playing out. Conagra (CAG -0.61%), for example, noted that buying habits among consumers have been unusual lately. Like so many other things in society, will a return to normal be coming soon?
Let's take a closer look at this food maker and what else it had to say about the situation.
Conagra gets stung by consumers re-balancing their lives
Conagra recently reported results for the fiscal first quarter of 2024. The company's performance was a bit of a mixed bag. Organic sales were off by 0.3% year over year while adjusted earnings were up 15.8% thanks largely to a 16.8 percentage point improvement in operating margin. A simplified view of this is that the company managed to do more with less, but there's more to the story.
Image source: Getty Images.
Summing things up, CEO Sean Connolly explained during Conagra's fiscal first-quarter 2024 earnings conference call how consumers were acting:
And the way to think about what we saw in the first quarter with respect to the behavior over the summer was, it was this paradoxical combination of selective splurging and broad-based belt tightening. So, as an example, consumers may have simply said, "I'm taking that summer trip and it's not up for debate," and then at the same time said, "I'm going to change some things up to create an offset."
So what does that really mean? Conagra believes consumers pulled back on food purchases so they could "revenge spend" in other areas, like travel. That includes things like putting off purchases, letting pantry stockpiles drop, and buying larger packages so the per-item cost is lower. However, the food maker's CEO also added:
But one of the other things we know about consumer habits and practices is that they are very hard to change long term. You know, so, these shifts tend to be temporary tactics that people use to get through a period of time when they've committed more of their cash to something else.
In other words, this, too, shall pass. At least that's what Conagra management thinks will happen.
Conagra is sticking with its plan
What Conagra shareholders need to take to heart is that company management believes this is a broad industry issue and not a commentary on any one company's products. So the soft organic sales figure in the fiscal first quarter should be discounted as a potential issue. In fact, there's already evidence that the "revenge travel" trend is already starting to ebb. Meanwhile, sales at some high-end retailers, including Tapestry, which owns Coach and other brands, and Capri, which makes Versace, have been less than robust.
On top of that, food from Conagra offers consumers convenience. Convenience is something that is hard to just give up for most people, especially if their lives are increasingly getting back to normal. As an example, working from home might allow a person the extra time needed to make themselves (or other family members) lunch. But if they are returning to the office, even just a few times a week, they may now lack the time to make food from scratch and might instead simply grab some Conagra-branded premade foods and toss them into a bag.
Notably, the consumer staples company is directing its marketing efforts toward the second half of fiscal 2024, as it believes market conditions will be much more attractive at that point. As investors look to the future here, however, Conagra projects another weak showing in the second fiscal quarter of 2024. Right now, guidance is for a low-single-digit organic sales decline and a sequential slump in gross margin.
That drop in gross margin is tied to the plans to boost advertising in the second half of the year. And it supports the company's expectations of single-digit organic sales growth over that six-month span. Volume growth will be the main driver of performance, with the company planning to maintain its advertising spend at an elevated level, a move that is expected to keep margins flat with the fiscal second quarter. Basically, Conagra is looking to lean into the back-to-normal shift in the way consumers are spending their money.
Conagra believes the future is bright
Conagra's stock price is down around 25% over the past year. The dividend yield of 5.1% is attractive on an absolute basis, as well as relative to the company's historical yield range. For investors with a contrarian bent, now could be a good time for a deep dive. Yes, it's facing headwinds but they seem broad-based for the food sector and not necessarily specific to Conagra. And if management is correct about shifting consumer spending patterns, the back half of the year could be very good for the company's results.
