CHICAGO – Conagra Brands, Inc. projected gross inflation during fiscal 2022 would be approximately 11%. The company now is predicting it will be closer to 14% for the fiscal year and is taking steps to mitigate the impact. The steps include incremental pricing actions, including list price increases, and modified merchandising plans.

“Many of these actions have already been announced to our customers,” said Sean Connolly, president and chief executive officer, during a Jan. 6 conference call to discuss second-quarter results. “There is a lag in timing between the impact of inflation and our ability to execute pricing adjustments based on that inflation. As a result, the incremental price increases will go into effect in the second half of the year with the most significant impact during the fourth quarter.”

As with almost all food and beverage companies, Conagra’s second-quarter performance was impacted by inflationary pressures. Net income for the period ended Nov. 28, 2021, was $276 million, equal to 57¢ per share on the common stock, and down 27% from the same period during the year prior when Conagra Brands earned $379 million, or 77¢.

Quarterly sales rose 2% to $3.06 billion.

The pressure on earnings may be seen in Conagra’s cost of goods sold during the quarter, which rose 9% to $2.3 billion. Another item that affected earnings was the divestiture of the H.K. Anderson, Peter Pan and Egg Beaters businesses.

“While our net sales exceeded our expectations, margin pressure in the second quarter was also higher than expected, driven by three key factors,” Mr. Connolly said. “First, while we anticipated elevated inflation during the second quarter, it was higher than our forecast. Second, we experienced some additional environment. And third, in the face of elevated consumer demand that continues to outpace our ability to supply, we elected to make investments to service orders and maximize product availability for our consumers.”

Prioritizing servicing customers also pressured margins because it led to a higher level of overtime pay.

“This deliberate decision ensured we could deliver food to our customers and consumers especially during the holiday season,” Mr. Connolly said. “Maintaining physical availability is an important part of building trust with customers and maintaining consumer loyalty.

“The bottom line is that amid the supply disruption seen across the industry, we remain focused on building for the long term. While the net result of these factors was a negative impact on our margins during the quarter, we’re confident that our purposeful approach better positions our portfolio for the future.”

Mr. Connolly emphasized that many of the near-term issues the company is facing are transitory and it is important for management to continue to focus on the long term. A specific long-term strategy is to attract and engage younger consumers.

“Millennial and Gen Z consumers are a large and growing cohort,” he said. “These consumers are starting to settle down, buy homes and start families. When people enter the family formation phase, they increase the amount of food they eat at home with an outsized increase in the consumption of frozen foods. And what we find particularly important about reaching millennial and Gen Z consumers is that we believe they will remain more value-focused than their predecessors.”

Conagra Brands made a few changes to its outlook for the rest of the year based on first-half performance. David Marberger, chief financial officer, said the company remains confident of achieving approximately $2.50 in adjusted earnings per share for the full fiscal year.

“As the macro environment continues to be very dynamic, our expectations for the path to achieve that target have shifted,” he said. “We are increasing our organic net sales growth guidance to approximately 3% to reflect our stronger-than-expected performance year-to-date as well as our incremental pricing actions in the second half.

“We are lowering our adjusted operating margin guidance to approximately 15.5%. We expect the incremental sales and pricing actions in the second half to offset the dollar impact of the incremental net inflation and other supply chain costs.”

For the first six months of fiscal 2022, Conagra Brands earned $511 million, equal to $1.06 per share, down from $708 million, or $1.45 per share, during the same period the year before.

First-half sales rose 0.7% to $5.7 billion.