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Campbell (CPB) Gains on Portfolio Refinement Amid Cost Woes

Zacks Equity Research

A focus on the snacks business and portfolio refinement efforts have kept Campbell Soup Company CPB on firm grounds amid escalated costs and weak U.S. soup sales. Notably, this renowned convenience foods provider’s shares have surged as much as 48% in a year, easily crushing the industry’s growth of 17.3%.

Let’s delve deeper.

Snacks Unit Strong

Campbell has been committed to shifting its overall portfolio toward the fast-growing snacks category, which is expected to form about half of its proforma sales in the future. Markedly, it acquired Snyder's-Lance in the third quarter of fiscal 2018, which is enhancing the performance of the snacking business. Markedly, the company’s snacks segment sales went up 2% to $989 million in first-quarter fiscal 2020. The segment gained from advancements in Pepperidge Farm cookies, Kettle Brand potato chips, Goldfish crackers, Cape Cod and fresh bakery products. Management expects the brands under the snacking category to continue boosting performance, backed by enhanced marketing and innovation.

Portfolio Refinement on Track

Campbell has been undertaking several actions to better focus on areas with greater potential, which includes its key North American business. Keeping in these lines, the company concluded the sale of Arnott’s and certain International operations to a New York-based private equity firm, KKR (KKR), last month. Further, it offloaded Campbell Fresh in fiscal 2019 and Kelsen Group on Sep 23. Additionally, the company divested its European chips business in October. These actions, which were part of its portfolio review and Board-led strategy, will help the company increase focus on the core North American market.

Will Hurdles be Countered?

Also, it is likely to help Campbell improve its sales scenario. Campbell’s net sales dropped 1% to $2,183 million in the first quarter of fiscal 2020 due to softness in the Meals & Beverages unit. Sales in this segment were marred by unfavorable timing of U.S. soup shipments. Notably, U.S. soup sales declined 3% due to adverse movements in retailer inventory levels across broth and condensed soups.

Apart from this, Campbell has been battling input cost inflation from escalated prices of steel cans along with vegetable and flower costs, among others. Management earlier stated that it expects overall cost inflation of nearly 3% in 2020, which is likely to affect profits.  Nevertheless, Campbell’s focus on supply-chain efficiencies along with curtailing costs and reinvesting part of these savings in areas with high growth potential is likely to drive growth. During the last earnings call, the company stated that it had generated savings of $605 million from its multi-year, cost-saving program.

All said, we expect this Zacks Rank #3 (Hold) stock to maintain momentum on the back of the aforementioned growth initiatives.

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