Conagra Brands' Q2 Earnings: Can Margin Resilience and Strategic Shifts Offset Headwinds?

Conagra Brands (CAG) reported mixed results for its Q2 fiscal 2025, with stagnant sales and margin pressures highlighting the challenges of navigating inflation, foreign exchange (forex) headwinds, and shifting consumer demand. While the company reaffirmed its focus on cost management and deleveraging, investors must weigh whether its updated guidance justifies current valuations. Here's a deep dive into the key takeaways and what they mean for investors.

Margin Pressures: A Persistent Challenge

Conagra's reported operating margin fell to 12.6% in Q2, a 138 basis-point (bps) decline from a year earlier, while its adjusted operating margin dropped 57 bps to 15.3%. These figures underscore the strain of rising input costs and a challenging macro environment.

The Grocery & Snacks segment, which grew sales by 2%, provided some relief, but Refrigerated & Frozen and International segments struggled. The latter, which saw sales plummet 12.9%, is particularly concerning due to forex and M&A-related impacts. Meanwhile, Foodservice sales declined 0.9%, reflecting weak restaurant traffic.

Key Question: Can Conagra stabilize margins as inflation eases and forex pressures stabilize? The company expects fiscal 2025 adjusted operating margins of ~14.8%, implying further erosion. This suggests management's ability to offset cost increases through pricing and efficiency gains remains unproven, posing a risk to profitability.

Inflation and Forex: Lingering Threats

Conagra cited inflation at ~4% for fiscal 2025, slightly below prior expectations, but forex headwinds—particularly in its International business—continue to weigh. The company's reliance on emerging markets (e.g., Mexico and Canada) exposes it to currency fluctuations, and while hedging can mitigate some risks, persistent weakness could dampen growth.

The International segment's adjusted operating profit fell marginally, despite cost controls, indicating forex impacts are structural rather than temporary. Investors should monitor whether Conagra can restructure this segment or pivot to more stable markets.

Free Cash Flow: A Silver Lining, But Not Unblemished

Conagra's free cash flow (FCF) conversion is expected to exceed 100%, a positive sign. However, first-half FCF dropped 19% year-over-year to $539 million, driven by lower operating profit and reduced equity method receipts.

While FCF remains robust, its decline underscores reliance on operational improvements. The company's net debt decreased to $8.4 billion, but the leverage ratio remains elevated at 3.54x. Debt reduction is critical to alleviate balance sheet risks, especially if margins continue to erode.

Balance Sheet Management: A Delicate Tightrope

Conagra's balance sheet shows modest progress: net debt fell 6.5% year-over-year, and it aims to reduce leverage further. However, the 3.54x leverage ratio remains high, and the company must prioritize debt paydown over shareholder returns.

Investors should watch for deleveraging actions, such as asset sales or cost-cutting, which could free up capital. Without meaningful progress, credit ratings could come under pressure, raising refinancing costs.

Outlook: Hold for Now, Watch for Catalysts

Conagra's updated guidance paints a cautious picture: organic sales are expected to be near flat, adjusted EPS between $2.45–$2.50, and margins pressured. While FCF resilience is a plus, the stock's valuation—trading at ~12x forward EPS—appears reasonable but lacks upside catalysts.

Recommendation: Hold. Investors should wait for signs of margin stabilization, improved sales momentum in International/Refrigerated segments, or accelerated deleveraging. A sustained drop below $25 could present a buying opportunity, but current conditions warrant caution.

Final Take

Conagra's Q2 results highlight the perils of operating in a high-inflation, low-growth environment. While its FCF and cost discipline offer a buffer, margin trends and forex risks remain unresolved. Until management demonstrates resilience in these areas, the stock is better suited for hold-and-wait investors rather than aggressive buyers.