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Campbell Rallies 11% in 3 Months on Solid Growth Efforts

Zacks Equity Research

Campbell Soup Company’s CPB shares rallied 10.6% in the past three months compared with the industry’s rise of 5.1%. Clearly, the company’s growth endeavors are yielding, and helping it counter hurdles like sluggish gross margin and softness in Campbell Fresh segment, among others.

Let’s delve deeper into the factors driving this Zacks Rank #3 (Hold) stock and see if these can help it sustain its impressive momentum.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Favoring Campbell

The company is keen on making acquisitions to enhance portfolio and accelerate growth. In this respect, contributions from Snyder's-Lance and Pacific Foods drove Campbell’s top line by 24% and 25% in the second and the first quarters of fiscal 2019, respectively. The company is on track with integration of the buyouts and expects them to keep fueling its performance. Notably, management expects sales of nearly $1,500-$1,550 million from these buyouts in fiscal 2019.

Additionally, Campbell is taking various important actions, including portfolio review and Board-led strategy, to enhance performance. Markedly, the company plans to focus on two separate businesses in its key North American market — Campbell Snacks, and Campbell Meals and Beverages. Further, the company intends to divest non-key businesses — Campbell International (which includes Arnott’s and the Kelsen Group) and Campbell Fresh — to sharpen focus and enhance portfolio.

In sync with such plans, the company recently unveiled plans to divest the Garden-Fresh Gourmet business. Prior to this, the company had announced plans to sell the Everett refrigerated soup plant. These businesses are part of the Campbell Fresh unit. Campbell plans to utilize proceeds from the sale of these businesses to curtail debt considerably. Management also highlighted that the divestitures of Bolthouse Farms and Campbell International are progressing well. Apart from these, the company is on track with initiatives such as stabilizing the core business, integrating the acquired businesses, boosting cost savings and strengthening portfolio.

Roadblocks in the Path

However, the company has been struggling with the Campbell Fresh segment for a while now. During the second quarter, sales in the segment slipped 7% to $239 million on account of softness in refrigerated soup, Garden-Fresh Gourmet and Bolthouse Farms refrigerated beverages. We note that continued softness in the Fresh category led to the divestiture of brands included in this unit.

Additionally, Campbell has long been witnessing strained gross margins. During the second quarter of fiscal 2019, the company’s adjusted gross margin contracted 4.3 percentage points to 30.9%, owing to acquisitions, cost inflation, escalated supply-chain expenses and increased promotional spending. The cost inflation stemmed from increased prices of vegetables, steel cans, aluminium and resins along with continued rise in transportation and logistics expenses. Persistence of such headwinds may hamper the company’s profitability in the forthcoming quarters. In fact, cost inflation is a common hurdle for many food companies like General Mills GIS, TreeHouse Foods THS and Conagra Brands CAG, among others.

Wrapping Up

Campbell’s cost-saving endeavors and the aforementioned drivers should help it stay protected. Incidentally, in the second quarter, the company generated savings worth $50 million as part of its multi-year cost-savings program. Further, management anticipates to generate cumulative annualized savings of $945 million by fiscal 2022 end. These factors along with Campbell’s prudent investments and efforts toward product innovation and brand building are likely to boost profitability and enable it to stay in investors’ good books.

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