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Conagra (CAG +1%) gives investors something to snack on as its slim Q3 (Feb) earnings and revenue misses prove better than feared today. In February, the consumer packaged goods giant, known for many brands from Slim Jim to Hebrew National, lowered its FY25 (May) guidance due to unforeseen supply chain challenges that cropped up during Q3. The company's facility that cooks chicken for frozen meals ran into quality inconsistencies, prompting a temporary halt in production. Meanwhile, demand was stronger than expected in CAG's frozen vegetables business, leading to inventory constraints. Both setbacks resulted in lost volume, lower net sales, and missed profit opportunities.

However, although shares slumped to 52-week lows on the reduced guidance, there was still a silver lining. Demand was not the issue as much as supply. Given how some of CAG's peers touched on snacking weakness lately, including PepsiCo (PEP), which owns Frito-Lay, and General Mills (GIS), citing a drop in consumer confidence, this was an encouraging point.

• Relatively resilient snacking demand underpins today's positive response despite CAG's weak headline performance. Consumption trends remained robust during the quarter, but shipments lagged due to the aforementioned supply chain headwinds, causing adjusted EPS of $0.51 and revenue of $2.84 bln, a 6.3% decline yr/yr (5.2% drop on an organic basis), to miss analyst forecasts. The supply chain issues showed up clearly in CAG's Refrigerated & Frozen segment, as net sales contracted by 7.2% yr/yr on a 3.0% dip in volumes.
• CAG's other segments performed slightly better but still reflected nagging economic headwinds suppressing consumers' spending appetites. In Grocery & Snacks, net sales slipped by 3.2% yr/yr, driven by a 1.3% volume decrease. However, management mentioned that the segment gained volume share across several categories, such as popcorn and canned tomatoes. In Foodservice, net sales declined by 6.1%, reflecting ongoing softness in commercial traffic. International net sales plunged 17.6% due to FX headwinds, which clipped off 8.5 pts.
• CAG kept its FY25 guidance unchanged, targeting adjusted EPS of $2.35 and organic net sales growth of around negative 2.0%. Management added that it is staying on its toes due to the dynamic external environment, including tariffs, regulatory changes (RFK Jr. has mentioned limiting SNAP benefits and food additive programs), inflation, and shifts in consumer sentiment.
  • Regarding tariffs, CAG stated today that it anticipates being impacted by tariffs on tin mill, steel, and aluminum, as well as Chinese imports, albeit to a lesser extent. The impact should be limited in Q4 as CAG works through inventory on hand. The company expects additional clarity following its Q4 results in July.

There were not many surprises from Q3, given that CAG grounded expectations two months earlier following supply chain problems. Still, investors are keeping CAG at arm's length, expressing cautious optimism as the market awaits further tariff news. As such, CAG may remain range-bound until closer to Q4 results in July.