After initially trading higher this morning, shares of food products company ConAgra (CAG 37.92, -0.22) trade about 0.6% lower as the stock reclaimed 6-month highs following earnings, guidance and an acquisition. The stock then, perhaps, is seeing some pressure as the conference call is ongoing and commentary from management about margin pressure.
Put simply, the report was better than expected; Q2 earnings came in at $0.55 per share and revenues of $2.17 billion grew better than 4% year-over-year and came in ahead of market expectations. The company estimates that the recent hurricanes increased its net sales and organic net sales growth rates by about 220 basis points.
As to margin pressure, management commented that higher-than-anticipated inflation, the aforementioned hurricane-related costs, and increased investments to drive distribution and consumer trial are pressuring margins in the near term. CAG expects fiscal 2018 operating margins to be near the low end of their guidance range as a result of these factors, and their transformation plan remains squarely on-track to achieve fiscal 2020 targets.
By segment, Grocery & Snacks performed the best by growing 6% to $900 million in Q2 on organic net sales growth of better than 2%. The acquisitions of the Duke's, BIGS, Frontera, and Angie's BOOMCHICKAPOP businesses added more than 300 basis points to the net sales growth rate. The company estimates that the recent hurricanes benefitted the net sales and organic net sales growth rates by about 200 basis points, primarily driven by inventory builds in both customer warehouses and consumer pantries in the second quarter which are expected to negatively impact the third quarter of fiscal 2018. Volume increased better than 3%, driven by hurricane-related benefits.
The second-largest segment, net sales for the Refrigerated & Frozen segment were up 2% to $758 million in Q2 on volume growth of 4%. Organic net sales increased 2%, aided by core business improvements and innovation launches by the Marie Callender's, Healthy Choice, and Banquet businesses. Continued growth in the core Reddi-wip business and the addition of frozen innovation launches by Frontera also added to the net sales growth rate.
Net sales for the International segment increased 4% to $220 million in Q2, while organic net sales were mostly flat compared to the year-ago period. Volumes decreased 2% and price/mix increased 2% as the segment executes the value over volume strategy through reductions in promotional intensity, improvements in pricing and trade productivity, and planned discontinuations of certain lower-performing products. Further, foreign exchange favorably impacted net sales by about 400 basis points.
Another strong segment, net sales for the Foodservice segment improved 4% to $295 million in Q2. CAG estimates that the recent hurricanes benefitted the net sales growth rate by about 10 percentage points. Also, volume decreased 7% as the segment executed the value over volume strategy by exiting noncore and lower-performing businesses. Price/mix increased 11% in Q2, primarily driven by favorable product and customer mix, as well as the impact of inflation-driven increases in pricing.
Guidance also aided the initial advance in shares. CAG now expects FY18 organic net sales growth near the high end of the range of flat to down 2%. The company also sees adjusted diluted EPS from continuing operations near the high end of the range of $1.84-1.89. Reported net sales growth is expected to be 100-150 basis points higher than the organic net sales growth rate due to the impacts of acquisitions and foreign exchange and adjusted operating margin near the low end of the range of 15.9-16.3%. Lastly, the company continues to expect to repurchase about $1.1 billion of shares of its common stock in the fiscal year, subject to market and other conditions.
If that weren’t enough, CAG also announced that as of quarter end it had acquired frozen breakfast and entrée flatbread business Sandwich Bros. of Wisconsin for an undisclosed amount. The deal is expected to close in early 2018 and management further commented on the conference call that the company would continue to stay active in M&A to enhance value.