CAG Q2 Deep Dive: Inflation and Supply Chain Weigh on Volumes and Guidance

Packaged foods company Conagra Brands (NYSE:CAG) missed Wall Street’s revenue expectations in Q2 CY2025, with sales falling 4.3% year on year to $2.78 billion. Its non-GAAP profit of $0.56 per share was 8.2% below analysts’ consensus estimates.

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StockStory’s Take

Conagra's second quarter faced notable headwinds, drawing a negative market response as both revenue and adjusted earnings per share came in below Wall Street expectations. Management attributed the underperformance to persistent inflationary pressures, particularly in animal protein inputs and packaging, as well as lingering supply chain constraints that impacted production in core categories like frozen foods and snacks. CEO Sean Connolly acknowledged, “the confluence of high inflation and higher investment to drive volume translates to temporary margin compression,” highlighting the deliberate trade-off between supporting brand strength and short-term profitability.

Looking forward, Conagra’s guidance reflects a cautious stance as management anticipates continued cost inflation and investment in supply chain resiliency. The company plans to prioritize volume recovery in its frozen and snack segments, even if this results in near-term margin pressure. Connolly emphasized, “we are investing margin this year in the service of volume,” while CFO Dave Marberger noted that supply chain investments, including expanding chicken processing capacity, are expected to support future growth. However, management remains wary of ongoing tariff impacts and the need to balance pricing actions with consumer sensitivity.

Key Insights from Management’s Remarks

Management pointed to several factors behind the recent quarter’s results, including cost inflation, category-specific volume pressures, and portfolio adjustments through divestitures.

• Persistent cost inflation: CFO Dave Marberger outlined that core input costs, especially animal proteins and packaging, continued to rise at double-digit rates, creating a significant drag on profitability and forcing Conagra to absorb rather than pass on much of the increase to consumers.
• Supply chain investments: The company faced ongoing supply chain constraints, particularly in chicken processing, which limited its ability to meet consumer demand for high-performing frozen products. Management is investing in both facilities and automation to increase resilience and efficiency.
• Portfolio reshaping: Recent divestitures, such as Chef Boyardee and select fish brands, reflect Conagra’s ongoing strategy to focus on higher-growth frozen and snack categories while using cash-generating businesses like canned foods to fund these priorities.
• Targeted pricing and merchandising: Management explained a differentiated approach, with margin investment and innovation driving growth in frozen and snacks, while selective price increases in canned foods offset tariff-related cost pressures. The company aims to maintain competitiveness in categories where private label brands are significant.
• Product innovation focus: New product launches, like Banquet Mega Chicken Fillets, demonstrated strong consumer reception and highlight Conagra’s efforts to premiumize its portfolio, especially by introducing multi-serve packaging and enhancing product quality across its frozen segment.

Drivers of Future Performance

Management expects near-term growth to be shaped by ongoing cost inflation, targeted investments in supply chain, and a focus on recovering core volumes.

• Volume recovery in key segments: Conagra’s strategy centers on rebuilding volume in frozen and snacks through increased marketing, innovation, and improved service levels. Management views healthy volumes in these areas as essential for long-term brand value and future cash flow generation.
• Margin expansion contingent on productivity: The company is counting on supply chain modernization, automation, and productivity gains—including AI-driven process improvements—to offset inflation and drive operating margin recovery in future years.
• Tariff and input cost risks: Management recognizes that tariffs on tinplate steel and ongoing input cost inflation remain significant uncertainties, particularly for the canned foods segment. The company’s ability to execute targeted price increases and mitigate these risks will be critical for achieving margin improvement.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will focus on (1) the pace of volume recovery in frozen and snack brands as supply chain investments come online, (2) Conagra’s ability to offset cost inflation and tariffs through productivity and targeted pricing, and (3) further portfolio adjustments or divestitures aimed at concentrating on higher-growth categories. We also view execution of new product launches and supply chain projects as important markers for sustained improvement.

Conagra currently trades at $19.50, down from $20.37 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free).

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