Packaged foods company Conagra Brands (CAG.N) warned that higher raw material and ingredient costs would take a bigger bite out of its profit this year than previously estimated, in another sign that supply chain hiccups are battering the sector.
COVID-19 vaccinations, low interest rates and nearly $6 trillion in government relief since the pandemic started last year are fueling demand for everything from cars to restaurant meals, straining the supply chain, creating labor shortages and raising prices across the economy.
U.S. consumer prices rose by the most in 13 years in June, the Labor Department said on Tuesday.
“As the fourth quarter unfolded, input cost inflation accelerated and we now expect fiscal 2022 input cost inflation to be materially higher than we anticipated at the end of fiscal Q3,” Conagra’s Chief Executive Officer Sean Connolly said in a fourth-quarter statement, which showed that profit missed expectations.
Ingredient and packaging costs represent 60% to 65% of total cost basket of Duncan Hines cake mixes and Marie Callender’s frozen meals maker.
“We anticipated that cost inflation would be an issue this coming fiscal year, but it was even higher than we expected,” Edward Jones analyst John Boylan said.
Conagra shares fell 4.3% in morning trade, even after it announced a 14% hike in its annual dividend.
The company now expects adjusted operating margins to be about 16% for its fiscal year ending May 2022, compared with the 18% to 19% it expected earlier.
While Conagra, like peers Unilever (ULVR.L) and General Mills (GIS.N), has been raising prices to offset inflation, it said it would have to be “aggressive” going forward.
However, it anticipates a lag between the time the company is hit with higher costs and when it realizes the benefits of its pricing actions. This lag is expected to be felt the most in the first quarter.