Campbell Soup Co. (NYSE:CPB) is much more than just a soup company. It also manufactures and markets branded convenience food products. The company is larger than you might imagine, and it operates through several segments. It has a U.S. Simple Meals segment, a Global Baking and Snacking segment, an International Simple Meals and Beverages segment, a U.S. Beverages segment and a Bolthouse/Foodservice segment.
Beyond soups, Campbell’s also sells broth and stocks, pasta sauces, Mexican sauces, snacks, cookies, crackers, bakery and frozen products, biscuits, juices and beverages, refrigerated beverages and refrigerated salad dressings, specialty entrées, and other prepared foods, as well as canned gravies, poultry, pasta, and beans. Its operations are in the United States, Canada, Australia, and the Asia Pacific region. It offers its products under the Campbell’s, Pepperidge Farm, Goldfish, V8, Pace, Prego, Swanson, Arnott’s, Bolthouse Farms, Plum, Kjeldsens, and Royal Dansk brand names.
The company sells its products directly and at its retail stores, as well as through third-party broker and distributor partners, retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores, dollar stores, and other retail, commercial, and non-commercial establishments. Just about every store you walk into carries at least one of Campbell’s products. The motivation for this article is to discuss whether this stable stock is a buy now that it has pulled back almost 10 percent off its highs. To help decide if the company, which pays a nice 2.8 percent yield, is a good investment, a review of the company’s performance and guidance looking ahead is justified.
Campbell’s continues to deliver stable and reliable results. In its most recent quarter, the company reported earnings from continuing operations of $184 million, or cents 58 per share, compared with earnings of $169 million, or 53 cents per share, in the prior year. Excluding certain items impacting comparability in both periods, adjusted earnings from continuing operations increased 7 percent to $195 million compared with $183 million in the prior year’s quarter, and adjusted earnings per share from continuing operations increased 7 percent to 62 cents compared with 58 cents in the year-ago quarter.
For the quarter, sales from continuing operations of $1.97 billion were comparable to the year-ago quarter. Organic sales increased by 1 percent. Contributing to this organic sales increase, we see that volume and mix added 2 percent, price and sales allowances added 2 percent, increased promotional spending subtracted 3 percent, acquisitions added 2 percent, and currency issues subtracted 2 percent.
One negative of the company was its decline in gross margin. Gross margin was 34.3 percent compared with 36 percent a year ago. Excluding items impacting comparability in both periods, adjusted gross margin for the quarter was 35.2 percent, compared with 37 percent a year ago. Some of the decline in gross margin was due to higher promotional spending, increased supply chain costs, cost inflation, and the impact of acquisitions, partly offset by productivity improvements and higher selling prices.
Marketing and selling expenses declined. In fact, they decreased 11 percent to $217 million. Further, administrative expenses decreased $30 million to $134 million. However, while expenses were down, the company’s tax rate increased. The tax rate in the quarter was 30.2 percent compared with 26.1 percent in the prior year, which of course is a negative impact to the bottom line. All things considered, it was a good quarter. However, Denise Morrison, Campbell’s president and CEO, was not thrilled despite the sales increases. I think this is a good thing, because it shows the company will push the envelope to up its performance.
She said: “While we delivered growth in third-quarter earnings, our organic sales growth of 1 percent reflected mixed performance and fell short of our expectations. Although I am encouraged by our 7 percent sales increase in U.S. Simple Meals, I am disappointed that our plans did not drive stronger sales results in U.S. Soup. We recognize that we were cycling a year-ago quarter when we delivered 14 percent growth in U.S. Soup. Despite an increase in the frequency of our promotional activity in the third quarter, we did not realize the anticipated lifts in a challenging consumer environment.”
Morrison added: “Sales of U.S. Soup held steady versus the strong performance in the year-ago quarter. Within U.S. Soup, Swanson broth maintained strong momentum as consumers responded to our strong marketing and continued to cook more with broth. I am pleased with our double-digit sales gain in U.S. Sauces including Prego, Pace and Campbell’s Skillet and Slow Cooker dinner sauces, with consumers using these products to prepare simple meals. I remain encouraged by the growing platform Bolthouse Farms provides us in the packaged fresh category with juices, salad dressings and carrots. We continue to address our challenges in U.S. Beverages and Australia. In both cases, our new leadership has plans to deliver better results.
“Given our performance year-to-date, we are lowering our guidance for full-year sales growth to approximately 3 percent. We are also refining our expectations for growth in adjusted EBIT and adjusted EPS. While we are not satisfied with our sales performance, we remain confident that we are pursuing the right strategy to reshape Campbell and deliver sustainable, profitable net sales growth as we continue to strengthen our core business and expand into faster-growing spaces.”
I like this response from the CEO. She is not accepting less than strong/improving performance. This is what we like to see at the helm of a company that we buy for slow, steady growth and a good dividend. Campbell’s isn’t the most exciting stock, but it is reliable. Now, looking ahead, the company has revised its full-year guidance for fiscal 2014. It expects that sales from continuing operations will grow approximately 3 percent in the current fiscal year, compared with the previous range of 4 to 5 percent.
That was a bit disappointing. Further, full-year growth in is expected to be at the low end of the previously forecast range of 4 to 6 percent. Adjusted earnings for the full year is also expected to be at the low end of the previously announced guidance of 2 to 4 percent, or $2.53 to $2.58 per share. However, I think that the recent sell off in the company is creating an opportunity to get long the company. I’d like to see the stock pull back another 5 or 6 percent, then pull the trigger and initiate a position.
Disclosure: Christopher F. Davis hold no position in Campbell Soup Co. and has no plans to initiate a position in the next 72 hours. He has a tentative buy rating on the stock and a $50 price target.