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Campbell Soup (CPB) Looks Troubled: Cost Inflation a Major Hurdle

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·5 min read
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Campbell Soup Company CPB appears to be in troubled waters. The company is encountering margin pressure from elevated inflation, a rise in supply-chain expenses and some executional headwinds related to the transformation plan (mainly in the Snacks segment). On the sales front, tough comparisons with the year-ago pandemic-led demand spike were a concern in third-quarter fiscal 2021, wherein both top and bottom lines declined year over year and missed the respective Zacks Consensus Estimate.

To top it, management slashed its adjusted earnings before interest and taxes (EBIT) and adjusted earnings per share (EPS) guidance. Incidentally, the Zacks Consensus Estimate for fiscal 2021 bottom line has trended downward by 5.2% to $2.91 per share over the past seven days. Also, the Zacks Rank #5 (Strong Sell) stock has tumbled 7.6% since the earnings release on Jun 9. In the past three months, shares of the company have declined 6.6% against the industry’s growth of 5.3%.

Zacks Investment Research
Zacks Investment Research

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The Roadblocks in Detail

During the third quarter, adjusted earnings from continuing operations tumbled 31% year over year to 57 cents per share, which fell short of the Zacks Consensus Estimate of 66 cents. The downside was a result of reduced adjusted EBIT. Net sales of $1,984 million decreased 11% year on year and missed the Zacks Consensus Estimate of $2,001.3 million. Further, organic sales declined 12%, as the company lapped the year-ago period’s unexpected food demand surge stemming from the elevated at-home consumption at the beginning of the pandemic. Third-quarter sales were largely hurt by tough comparisons with the year-ago period, which benefited from the initial demand spike due to the pandemic-led at-home consumption. Apart from these, quarterly results were affected by the increasing inflationary landscape.

We note that the company has been struggling with cost inflation for a while. During the third quarter of fiscal 2021, adjusted gross margin contracted 290 basis points to 31.8%. The downside was caused by cost inflation (especially freight rate), other supply-chain expenses, adverse mix and reduced operating leverage. The gross margin bore the brunt of an increasing inflationary landscape, the transition to a post-pandemic operating environment, short-term rise in supply-chain expenses and some executional headwinds related to the transformation plan (mainly in the Snacks segment). Adjusted EBIT declined 27% to reach $283 million, mainly on account of lower sales volumes and reduced adjusted gross margin, somewhat made up by a decline in marketing and selling costs.

Also, the company expects to encounter continued margin pressure in the fourth quarter due to transitioning out from the pandemic-led landscape as well as stronger inflation. Based on its third-quarter results and impacts from the divestiture of the Plum baby food and snacks business (on May 3), management revised its guidance for fiscal 2021. Moreover, management highlighted that fiscal 2020 included an additional week, which was estimated to contribute 2 percentage points to net sales and about 4 cents to the bottom line.

For fiscal 2021, the company now expects net sales to decline in a band of 3-3.5% compared with a 2.5-3.5% decrease expected earlier. Organic net sales are anticipated to fall 0.7-1.2% now, in comparison with a 0.5-1.5% decline projected before. Adjusted EBIT is now envisioned to decline 4-5% in fiscal 2021. Earlier, adjusted EBIT growth was forecasted in the range of a 1% decline to a 1% increase. Adjusted EPS is envisioned in the range of $2.90-$2.93 now, indicating a 1-2% dip from the figure reported in the year-ago period. Prior to this, the bottom line was anticipated to be $3.03-$3.11 per share, indicating growth of 3-5% from adjusted EPS of $2.95 reported in the prior year.

Wrapping Up

Campbell Soup has been progressing well with its cost-saving plan. Management anticipates annualized savings of $850 million by fiscal 2022-end. Also, on its third-quarter fiscal 2021 earnings call, management stated that it is undertaking necessary actions, which include taking pricing initiatives, to tide over the inflated cost hurdles. However, gains from pricing actions are expected to contribute in fiscal 2022. That said, we cannot ignore the near-term hurdles.

Binge on These 3 Food Stocks

Medifast MED, which currently carries a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 12.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hain Celestial HAIN has a Zacks Rank #2 (Buy) and its bottom line outpaced the Zacks Consensus Estimate by 26.4% in the trailing four quarters, on average.

Nomad Foods NOMD has a Zacks Rank #2 and its bottom line outpaced the Zacks Consensus Estimate by 10.3% in the trailing four quarters, on average.

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