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Campbell Down 7% in 6 Months: High Costs Not the Only Factor

Zacks Equity Research
Campbell Down 7% in 6 Months: High Costs Not the Only Factor

Campbell Soup Company CPB has been off investors’ radar for a while now, which can be explained by its not so impressive past sales performance. The company, which has posted negative sales surprise in six of the past seven quarters, has also been witnessing strained margins for a while now. These factors seem to have hurt investors’ confidence in Campbell’s ongoing prospects, evident from management’s drab outlook.

Markedly, this Zacks Rank #5 (Strong Sell) stock has lost 7.4% in the past six months, whereas the industry saw a marginal drop of 0.1%. Let’s delve deeper into the factors that have been troubling Campbell Soup.



Murky U.S. Soup Sales, Unimpressive View

Campbell Soup’s organic sales dropped 3% in fourth-quarter fiscal 2018 owing to decline in Americas Simple Meals and Beverages unit. During the quarter, this unit witnessed a 6% drop in organic sales, mainly due to softness across U.S. Soup and Canadian sales. Excluding gains from the Pacific Foods buyout, U.S. Soup sales tumbled 14% on account of lower sales of condensed soups, broth and ready-to-serve soups. U.S. Soup sales were hampered by intense competition and reduced promotional activities.  Going ahead, management expects organic sales to fall slightly in fiscal 2019. Though the company is making efforts to improve trends in the U.S. Soup business, sales at this business are likely to decrease in fiscal 2019. Apart from this, management also expects Campbell Fresh sales to be hurt by the termination of two key private-label refrigerated soup deals.

Cost Inflation Remains a Major Hurdle

Campbell has been witnessing strained margins for a while now. In fourth-quarter fiscal 2018, the company’s adjusted gross margin contracted 5.6 percentage points to 30.6%, accountable to impact from buyouts, cost inflation, escalated supply-chain expenses, adverse mix, increased promotional spending and impacts from the recall of flavor-blasted Goldfish crackers. The cost inflation stemmed from increased prices of dairy, steel cans, meat and resins along with greater-than-expected rise in transportation and logistics expenses. Gross margin softness and higher adjusted marketing and selling expenses also weighed on Campbell’s EBIT margin. Management expects fiscal 2019 gross margin to decline nearly 2 percentage points on account of cost inflation and unfavorable mix related to the acquired businesses.

Estimates Fall on Disappointing Q4 Earnings & Guidance

Campbell Soup’s adjusted earnings of 25 cents per share slumped nearly 52% year over year in the fourth quarter, led by a rise in interest expenses and adjusted tax rate, a fall in adjusted EBIT on base business and the dilutive effect of recent buyouts. Incidentally, adjusted net interest expenses escalated on account of debt related to the buyout of Synder’s-Lance as well as greater average interest rates. In fiscal 2019, management expects EBIT to remain pressurized. This is likely to weigh on the bottom line, which is also expected to bear the brunt of higher interest expenses.

Moreover, Campbell expects its first-quarter performance to be dented by the new revenue accounting standard as well as effects of product Goldfish recall. Additionally, the company expects U.S. Soup business to remain pressurized in the first quarter. Consequently, the Zacks Consensus Estimate for the first quarter and fiscal 2019 has gone down from 89 cents to 75 cents and from $2.85 to $2.59, respectively, in the past 30 days.

Though Campbell’s cost-saving initiatives, contributions from buyouts and recently announced actions post strategic review instill hopes for its recovery, we cannot ignore the hurdles, at least for the near term.

Done With Campbell? Go for These Solid Food Stocks

Medifast MED, with a Zacks Rank #1 (Strong Buy), delivered positive earnings surprise in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chefs’ Warehouse CHEF, with long-term earnings per share growth rate of 22%, carries a Zacks Rank #2 (Buy).

Pinnacle Foods PF has long-term earnings per share growth rate of 8% and a Zacks Rank #2.

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