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Campbell Soup (CPB) Poised on Pandemic-Led Demand, Hurt by Costs

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Zacks Equity Research
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Companies in the food industry have been witnessing improvement in their businesses, courtesy of shift to at-home consumption trend amid the pandemic. One such company to benefit from this trend is Campbell Soup Company CPB. Apart from this, the company’s fast-growing Snacks business is yielding. Also, its cost-saving initiatives are providing a breather amid pandemic-led expenses and cost inflation.

Let’s delve deeper.

Pandemic-Led Demand Drives Growth

Increasing at-home cooking trend amid the coronavirus outbreak has been driving Campbell Soup’s growth. In fact, burgeoning demand amid the pandemic bolstered second-quarter fiscal 2021 results, with the top and the bottom line advancing year over year. This reflects strength in the Snacks and the Meals & Beverages segments. Further, earnings surpassed the Zacks Consensus Estimate in the quarter. Organic sales increased 5%, courtesy of 4% improvement in volume and mix. The upside can be attributed to pandemic-led demand, which was somewhat negated by declines in Foodservice business.

Strength in Snacks Business

Campbell Soup has been benefitting from its impressive Snacks business. The segment contributed almost 43% to the company’s top line in the fiscal second quarter. Segmental net sales were up 4% during the quarter. The division benefited from higher volume, which can be attributed to strength in majority of the company’s power brands. Also, reduced promotional spending on supply constrained brands was a reason. Moreover, operating earnings in the unit moved up 6%, courtesy of gains in sales volume and reduced selling expenses. Well, brands under the snacking category are likely to continue boosting performance, backed by innovations and favorable customer response.

Is all Rosy for Campbell Soup?

Campbell Soup has been struggling with cost inflation for a while now. During fiscal second quarter, adjusted gross margin contracted 10 basis points to 34.3%, thanks to cost inflation, other operational costs and pandemic-induced expenses. Additionally, higher adjusted administrative expenses were a drag on the company’s adjusted earnings before interest and taxes (EBIT) performance in the quarter.

In its last earnings call, management highlighted that it expects fiscal third-quarter net sales and EBIT to remain more challenged than the fourth quarter. Notably, third-quarter performance is expected to reflect adverse supply challenges stemming from recent winter storms. The company saw nearly two weeks of disruption at its Paris, Texas facility thanks to the recent winter storms.

That said, effective cost-saving plans along with the aforementioned upsides are likely to help this Zacks Rank #3 (Hold) company stay afloat amid such hurdles. Notably, Campbell Soup generated savings worth more than $20 million as part of its multi-year cost-saving program during fiscal second quarter. This included synergies associated with the Snyder’s-Lance buyout. With this, the company generated total program-to-date savings of nearly $760 million. Management continues to anticipate annualized savings of $850 million by fiscal 2022-end.

Shares of Campbell Soup have increased 5.8% in the past three months compared with the industry’s growth of 8%.

Some Solid Food Stocks

The Hain Celestial HAIN, currently carrying a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 26.7%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

United Natural Foods, Inc. UNFI, currently carrying a Zacks Rank #2, has a trailing four-quarter earnings surprise of 13.6%, on average.

The J. M. Smucker Company SJM, currently carrying a Zacks Rank #2, has a long-term earnings growth rate of 1.7%.

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