Conagra Brands, Inc. CAG leverages strategic initiatives to boost growth and recover margins despite a challenging market environment. The company’s strong performance in snacks and frozen foods, coupled with portfolio restructuring to meet shifting consumer demands, highlights its growth strategy. However, underlying inflation and a struggling Foodservice unit raise concerns about its ability to maintain momentum.

Strategic Moves Power CAG’s Growth Story

Conagra is actively reshaping its portfolio to drive growth and improve margins by investing in innovation, brand modernization and strategic acquisitions or divestitures. In first-quarter fiscal 2025, the company acquired FATTY Smoked Meat Sticks, strengthening its position in the high-growth, high-margin meat stick category. In addition, the company divested its majority stake in Agro Tech Foods Limited in India. Over the past decade, Conagra has made significant progress in transforming its portfolio, and management will continue exploring opportunities for accelerated growth and improved profitability.

Conagra's productivity initiatives are essential to its strategic approach, as the savings fuel investments in brand-building and portfolio restructuring. In the fiscal first quarter, management reported continued improvements in free cash flow, reducing the cash conversion cycle by seven days compared to the previous period.

CAG’s Growth in Snacks and Frozen Categories

On its last earnings call, management highlighted that the company’s snack offerings significantly outperform the overall snacking category, thanks to its strong portfolio. Its brands are positioned in trending, permissible snacking segments such as meat snacks, popcorn and seeds, aligning with consumer preferences for low-carb, protein- and fiber-rich options. Brands like Slim Jim, Duke's, David and Angie's BOOMCHICKAPOP are leading this shift. The permissible snacking market is expanding rapidly, and Conagra’s well-established brands are reaping the benefits.

Conagra has been seeing market share gains in the key frozen and snacks categories. The strength of the frozen category reflects the forte of the company’s brands and the effective execution of the Conagra Way playbook. Conagra has made several investments in the innovation of key brands of the frozen business, which are yielding a favorable response. Conagra has achieved significant volume improvement in its domestic retail business, particularly in the strategic frozen and snack categories.

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Roadblocks for Conagra

Conagra has been encountering cost inflation for a while, which is affecting its profitability. In the fiscal first quarter, the company witnessed year-over-year inflation in the cost of goods sold (COGS) of 3.3% due to increases in protein, sweetener and warehousing expenses. The adjusted gross margin contracted 163 basis points to 26% in the quarter, thanks to lower organic net sales, cost of goods sold inflation, adverse operating leverage and the impacts of the manufacturing disruptions. Management expects a fiscal 2025 COGS inflation rate of nearly 3.2%, pronounced in the protein and sweetener categories.

Conagra’s Foodservice unit is under pressure due to sluggish consumption trends, reflecting broader industry challenges. The segment’s reported sales decline of 7.8% to $266.7 million in the fiscal first quarter. Organic sales tumbled 7.9%, whereas volumes declined 11.1% on account of the ongoing effects of the exit of lower margin business, along with the current sluggishness in restaurant traffic. The persistence of this trend remains a concern as the segment continues to navigate a tough operating environment with ongoing pressures on consumer demand and dining-out behavior.

Final Words on CAG Stock

Conagra’s strategic focus on high-growth categories like snacks and frozen foods is promising, but persistent inflation presents significant obstacles. With the company targeting $1 billion in cost savings by the end of fiscal 2025, its productivity initiatives could help mitigate some pressures. However, the effectiveness of these measures in driving sustained profitability remains to be seen. At present, CAG carries a Zacks Rank #3 (Hold).

Shares of the company have dropped 13.6% in the past three months compared with the industry’s decline of 4.7%.

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