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ConAgra 1Q profit falls on higher costs

ConAgra Foods Inc.’s fiscal first-quarter net income fell 42 percent as soaring costs for ingredients cut into its profitability.

The maker of foods such as Slim Jim, Chef Boyardee and Healthy Choice said Tuesday that it is dealing with “severe” cost inflation. The company backed its full-year earnings forecast, but said it expects those costs to grow during the year and it will continue to increase its prices.

It’s tough news for shoppers, whose budgets are already strained, as it appears food makers are likely to continue to raise prices as they have for the past year or more.

ConAgra and other food makers have raised prices to offset soaring costs for ingredients, packaging and fuel. The USDA estimates that the cost for food that consumers buy to eat at home will go up 3.5 to 4.5 percent for 2011 and another 3 to 4 percent in 2012.

ConAgra said Tuesday that those costs are higher than the company had anticipated and it expects cost inflation of 9 to 10 percent for the year, up from its previous estimate of 7 to 8 percent.

The company, which raised its prices roughly 4 percent during the first quarter, said it does not expect to see the benefit of higher prices on its profits until the second half of the year.

ConAgra reported net income of $85.3 million, or 20 cents per share, for the period ended Aug. 28, down from $146.4 million, or 33 cents per share, a year earlier. Excluding a restructuring charge and other items, the company earned 29 cents per share versus 34 cents per share in the prior year.

While ConAgra had warned investors in June that the earnings might be below the prior year, it fell more than the company expected because of the higher costs. The earnings also fell short of analyst expectations of the 31 cents per share that analysts polled by FactSet had anticipated.

ConAgra said while costs were up across its business, the biggest contributors were higher prices for meats, packaging, fats and oils. It also had a particularly tough quarter in its flour milling business where an annual switch in wheat crop was much more expensive than last year, and helped drive profit down 14 percent.

ConAgra’s revenue rose 10 percent to $3.07 billion from $2.8 billion, surpassing analyst’s estimate of $2.94 billion. The company managed to maintain steady sales volume despite the higher prices.

The consumer foods unit, which made up 62 percent of the quarter’s revenue, reported a 4 percent increase in revenue thanks in part to higher prices and strong sales of brands like Peter Pan, Reddi-wip, Slim Jim, Swiss Miss and Wesson.

In its commercial foods division, which sells foods sold to foodservice and commercial businesses, revenue climbed 19 percent on higher flour prices and price increases.

ConAgra said it plans price increases for both units in the future but decline to specify the size of those hikes. The company said that despite the increases, it still sees itself as an attractive option for today’s cost-conscious consumer.

“We understand the current difficult conditions facing everyday consumers — our consumers. And those conditions impose practical limits on what we can and should do through pricing. We get that,” ConAgra CEO Gary Rodkin told investors in a conference call. “The main point is that even after responsible pricing, our products including hundreds of meal (products) for less than $3 are still a really strong value for consumers.”

ConAgra still expects a low- to mid-single-digit rate increase in fiscal 2012 adjusted earnings. The company earned $1.75 per share a year ago. Wall Street forecasts full-year earnings of $1.81 per share.

For the second quarter, ConAgra anticipates earnings will come in below the prior-year period’s 45 cents per share due to higher costs and increased marketing investments. Analysts predict earnings of 45 cents per share for the quarter.

ConAgra, based in Omaha, Neb., also said it will continue to pursue potential acquisitions.

The company withdrew its $5.17 billion takeover bid for cereal and food maker Ralcorp Holdings Inc. on Monday. Ralcorp, which makes private-label food and Post cereal, has rejected several bids from ConAgra since March, including its latest $94 per share bid last month.

ConAgra gave Ralcorp a Monday deadline to start discussions or it would walk away. Ralcorp rejected the offer for a second time on Monday and ConAgra withdrew its bid.

Shares of ConAgra fell 40 cents to close at $22.99 Tuesday.

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Sarah Skidmore contributed to this report from Portland, Ore. Michelle Chapman contributed from New York.

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