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Strong Demand Conditions Support Campbell Amid Rising Costs

Zacks Equity Research
·4 min read

At home-dining trend is gaining prominence amid the ongoing coronavirus pandemic. This is boosting the performance of several food industry players, including the Campbell Soup Company CPB. This trend was well reflected the company’s fourth-quarter fiscal 2020 results, with earnings and revenues increasing double digits and cruising ahead of the Zacks Consensus Estimate. However, pandemic-led high input costs have been a headwind for the company. Let’s take a closer look.

Strong Demand is a Key Catalyst

Campbell’s fourth-quarter performance was mainly steered by strong demand conditions, stemming from increased at-home consumption. The trend favored the company’s top line in the said quarter, which rose 18% year over year. Moreover, organic sales rose 12% on the back of solid volumes in Meals & Beverages and Snacks segments. Moreover, the company was able to increase household penetration across most key brands. This led to a 4-percentage-point increase in total company household penetration in the fourth quarter.

Management expects that demand and supply-chain conditions are likely to stay favorable in first-quarter fiscal 2021. Accordingly, it expects net sales in the first quarter to increase in the band of 5-7% year on year.

Savings Plans & Other Efforts 

Campbell is progressing well with its cost-saving endeavors. During the fourth quarter, the company generated savings worth $45 million as part of its multi-year, cost-saving program, which included synergies associated with the Snyder’s-Lance buyout. With this, the company generated total program-to-date savings of $725 million. Savings generated in fiscal 2020 amounted to $165 million. Further, management continues to anticipate cumulative annualized savings from continuing operations of $850 million by fiscal 2022-end.

Apart from this, Campbell is on track with investments in product innovation and brand building, especially in its fast-growing Snacks business. Markedly, sales in this division rose 11% during the fourth quarter. These measures along with other prudent strategic growth initiatives are likely to continue favoring the company’s performance.

High Costs are a Roadblock

Campbell has been struggling with cost inflation for a while. During the fourth quarter, gross margin was partly impacted by cost inflation and other supply-chain expenses (including costs associated with COVID-19). Cost inflation and other factors adversely impacted performance by 210 basis points. Overall input prices (on a rate basis) rose nearly 1.5%. Cost inflation, stemming from COVID-19, was a headwind to the company’s gross margin performance in the third quarter as well.

Further, the company undertook several marketing investments in the fourth quarter, under the Snacks and Meals & Beverages segments. Overall marketing and selling expenses escalated 37%, with advertising and consumer promotion expenses nearly doubling. The company plans to continue investing in marketing ventures. This is likely to put pressure on profits to some extent.

Final Thoughts

We expect that Campbell’s prudent cost-saving actions will help cushioning the challenges emerging out of rising costs. Moreover, benefits from favorable product mix, enhanced operating leverage, supply-chain enhancements and commodity hedges are likely to help offset cost-related woes. Such upsides along with gains from a favorable demand scenario are likely to work in favor of this Zacks Rank #3 (Hold) company.

We note that shares of Campbell have declined 1.7% in the past six months against the industry’s rise of 16.7%.

Looking for Solid Food Stocks? Check These

The Hain Celestial Group HAIN, which currently sports a Zacks Rank #1 (Strong Buy), has an impressive earnings surprise record. You can see the complete list of today’s Zacks #1 Rank stocks here.

General Mills GIS, with a Zacks Rank #2 (Buy), has a robust earnings surprise record.

Lamb Weston Holdings LW also carries a Zacks Rank #2, and has a long-term earnings growth rate of 7%.

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The Hain Celestial Group, Inc. (HAIN) : Free Stock Analysis Report
 
Campbell Soup Company (CPB) : Free Stock Analysis Report
 
General Mills, Inc. (GIS) : Free Stock Analysis Report
 
Lamb Weston Holdings Inc. (LW) : Free Stock Analysis Report
 
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