Costs take bite out of ConAgra profits

The continued price inflation in commodities deflated third-quarter profits for ConAgra Foods.

The Omaha-based packaged food giant still beat Wall Street estimates, posting net income of $214.8 million, or 50 cents per share, during its fiscal third quarter. That compares with $229.6 million and 51 cents per share a year ago. Analysts expected 46 cents per share.

Saddled with higher commodity costs on everything from proteins to edible oils to packaging materials, ConAgra raised prices on about half of its products during the quarter. Consumer response to those increases won’t be fully realized until the fourth quarter, company officials said Thursday.

Grocery shoppers will help dictate ConAgra’s earnings output in the near term. Will consumers pay for a higher-priced Healthy Choice meal while they’re feeling pinched by inflated prices for gasoline, meat and vegetables?

A University of Nebraska at Omaha associate professor who studies consumer behavior said that people notice more when price increases are imposed on cheap, regularly purchased items, like a gallon of milk or a loaf of bread.

“For lower-priced items, they can change even a little and consumers are going to complain,” said UNO’s Jonna Holland.

That’s not good news for ConAgra, which relied on sales of cheap, convenient meals to cruise through the recession, and it will put significant pressure on the company to create successful advertising.

“Marketers have to justify why their products are worth it,” Holland said. “They need to make sure customers are satisfied with the quality of their product and find that it meets their needs. If they don’t, consumers won’t think they need to buy it after all.”

Even if all customers don’t react favorably to price hikes, Gary Rodkin, ConAgra’s chief executive, said the company is prepared for the difficult conditions to continue and is bracing itself for even higher inflation in the fourth quarter.

However, Rodkin also is confident that the foundation of brands and a focus on innovation and marketing that he’s helped build at ConAgra is strong enough to navigate through the tough operating environment.

“That’s what we manage for, the long term,” he said.

In addition to raising prices, the company is installing price-saving measures in its supply chain, paring back incentive compensation and lowering its advertising spending to save about $275 million in its consumer foods division. Those savings are needed to offset bloated commodity prices, the company said.

Sales during the 13-week period totaled $3.15 billion, a 4.1 percent increase from $3.03 billion a year ago. Consumer foods sales were almost flat, $2.08 billion versus $2.03 billion last year. And ConAgra’s commercial food operations recorded sales of $1.07 billion in the quarter, compared with $996 million during the prior-year period, spurred by high-profit-margin sales of sweet potatoes and in the company’s flour-milling division.

Major brands — including Banquet, Healthy Choice, Marie Callender’s, Peter Pan peanut butter and Slim Jim meat snacks — all had sales growth during the quarter, ConAgra said.