2nd UPDATE: ConAgra 2Q Net Falls 16% Amid Weaker Margins

ConAgra Foods Inc. (CAG) is raising prices in response to higher commodity costs and adjusting merchandising strategies to accommodate consumers who no longer stock up on grocery trips.

ConAgra, which Tuesday reported a 16% decline in fiscal second-quarter earnings, hopes the strategies can help boost profits in the back half of its fiscal year.

ConAgra, which makes Healthy Choice meals, Slim Jim meat snacks and Reddi-wip, has recently raised prices on cook oils and snacks, and plans to do the same on other products in the coming months. It's part of an industry-wide trend, as food makers like Kellogg Co. (K) and General Mills Inc. (GIS) are all raising prices to offset higher costs for wheat, proteins and other ingredients.

ConAgra expects to see a modest decline in sales volume from the higher prices, but expects the benefits to outweigh the drawbacks from lower profit margins.

"We simply cannot have deflationary or even flat pricing in light of significant and accelerating input cost inflation," ConAgra Chief Executive Gary Rodkin said on Tuesday's earnings call with analysts.

ConAgra will also adjust merchandising tactics in response to a consumer that's making more trips to grocery stores to just buy the essential ingredients rather than items to stock their pantries. ConAgra will experiment with downsizing the number of items in bulk packs at club stores like Costco Wholesale Corp. (COST) and BJ's Wholesale Club Inc. (BJ). Promotions will also focus on offering fewer items, offering five of a product for $5 instead of 10 for $10.

ConAgra's plan to raise prices echoes that of Kellogg and General Mills. The manufacturers hope that pressure from higher commodity costs will spell an end to aggressive promotions across the industry and force companies to raise retail prices. The challenge will be whether consumers, who have grown accustomed to getting deals at supermarkets, will take to the higher prices.

ConAgra also expects cost savings and lower overhead costs to support a better back half to 2011. Shares of ConAgra, which earlier this month pre-released the disappointing earnings, were up 0.8% in recent trading at $22.63.

For the quarter ended Nov. 28, ConAgra had a profit of $200.9 million, or 46 cents a share, down from $239.7 million, or 54 cents a share, a year earlier. Excluding hedging and other impacts, earnings from continuing operations fell to 45 cents from 51 cents, matching last week's lowered view.

Net sales increased 2% to $3.16 billion. Analysts polled by Thomson Reuters recently expected $3.13 billion.

Gross margin fell to 24% from 27.2%.

At ConAgra's consumer-foods unit, its largest, volume rose 1%, but consumer response to promotions was weaker-than-expected and earnings declined 14% in the segment.

At its commercial-foods segment--which includes frozen potato products, flour and seasonings--revenue improved 3% but profit fell 16% on higher costs of processing and selling last year's more expensive potato crop.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

--Tess Stynes contributed to this article.

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