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Consumer packaged goods titan Conagra (CAG -9%), famous for many brands from Slim Jim to Vlasic, is being chewed out today over a rare earnings miss on a wider yr/yr sales decline than expected in Q1 (Aug). CAG did warn last quarter that FY25 would be a transition year, keeping expectations in check as consumers adapt to higher prices. However, CAG has not missed top and bottom-line estimates since 3Q20 (Feb), which was during the early stages of the pandemic, making today's headline numbers so shocking.

• What happened? CAG endured a manufacturing disruption, requiring it to pause production at its Hebrew National hotdog plant. With Q1 containing prime grilling months, this setback could not have happened at a worse time. While CAG was able to fully restart operations, the pause resulted in material damage, including Hebrew National posting a 47% drop in sales yr/yr. The company estimates that this disturbance clipped 60 bps off consolidated volumes and 90 bps off total organic sales.
  • The loss was even worse in the Refrigerated and Frozen segment, which saw an estimated 150 bps sliced off volumes and 210 bps removed from organic net sales.
• As a result, earnings and sales took a hit, contracting by 19.7% and 3.8% yr/yr, respectively. Organic net sales, which excludes FX impacts, divested businesses, and M&A, declined by 3.5%. Volumes slid by 1.6% yr/yr, marking CAG's 14th consecutive quarter of volume compression.
• There were still bright spots. Even when including the Hebrew National impact, volumes improved sequentially from the 1.8% decline delivered over the past two quarters. Also, CAG delivered yr/yr volume growth across its frozen and snacks categories, two investment focus areas. Management added that staples volumes should continue to improve as it exits Q1 as the impact of last year's price increase wanes. It is also worth pointing out that approximately 71% of CAG's portfolio held or gained volume share in Q1.

In an environment ripe with inflationary pressures and a strained end consumer, out-of-plan setbacks are the last thing CAG needs. However, the good news is that CAG anticipates Q1 to be an aberration, noting that most of the impact of the plant disruption would be isolated to Q1. As such, management reiterated its FY25 guidance, including adjusted EPS of $2.60-2.65 and organic sales growth of negative 1.5% to flat yr/yr.

Nevertheless, investors are concerned that following the plant disruption, the lingering macroeconomic headwinds could prove too intense for CAG to make up the shortfall in its remaining quarters this year, sparking significant profit-taking today. CAG was up over +16% from July lows heading into its Q1 report today.