Campbell Soup Company (NYSE:CPB), the food products company behind Campbell’s soup, Pepperidge Farm crackers, and V-8 fruit drinks, reported fourth quarter and fiscal year 2011 earnings on Friday morning. Despite the beating that the indices took before the holiday weekend, CPB held up relatively well, dropping 1.3% compared to 2.2% and 2.5% for the DJIA and S&P 500, respectively. Here are some of the highlights from the fourth quarter and the call:
In the quarter, sales increased 6% to $1.607 billion; after backing out currency effects, the revenue increase was 1%, with price adding 2%, while volume decreased 2% (lower promotional spend accounts for the remainder). For the full year, sales increased 1% to more than $7.7 billion.
Net earnings for the quarter were $100 million, or $0.31 per share, compared with $113 million, or $0.33 per share, in Q4 2010. At the end of June, the company announced a restructuring program to improve supply chain efficiency, along with plans to exit the Russian market, which collectively cost the company $41 million in Q4 (after-tax). Excluding these charges (which I’m not necessarily advocating for analysis, rather noting for full disclosure), non-GAAP earnings increased 25% to $141 million, along with a 30% increase in EPS to $0.43.
Net earnings for the year were $805 million, or $2.42 per share, compared with $844 million, or $2.42 per share, in 2010. After backing out one-time items in both periods, adjusted net earnings declined 2% to $846 million, while EPS increased 3% to $2.54 due to the repurchase of 21 million shares throughout the year at a cost of $728 million (roughly $34.50 a share).
For the 12 months ended July 31, 2011, the company paid $1.145 a share in dividends, marking the 55th consecutive year the company has paid dividends to shareholders (since 1954). At the current price, the stock’s dividend is yielding more than 3.6%.
As readers of my past articles will note, I’m particularly interested in consumer products companies for two reasons: First off, the current economic environment has proved challenging, and these companies have their finger on the consumer’s pulse. As such, what they have to say is material to my understanding of the current economic environment. Secondly, I am interested in hearing what each company plans to do to drive sales while attempting to simultaneously maintain margins and volume, a two-part move that has proven difficult for many.
A great example of this is management’s discussion on soup sales, a category that has seen rampant promotional spend during the economic downturn. Here is what CEO Denise Morrison said about sales in that category and their plans for the future: “Soup volumes and consumption were softer this quarter as we expected because price realization is coming through. We have 2 more quarters ahead where we will be cycling the heavy discounting activity. While we expect further volume declines, we will be competitive and we believe elasticity will normalize over time.”
Much like on the cereal aisle, soup has become a commodity product that has sales volume driven by promotional activity, such as buy-one-get-one type deals. Campbell’s, which has spent more than 140 years building their brand in the food business, isn’t looking to compete on price with private labels. As such, it will be interesting to see what Campbell’s can do in the coming years to convince shoppers that their brand is worth the premium (a return to less price-driven, elastic demand).
On the broader economy, here is what Ms. Morrison had to say, and how Campbell’s plans to move ahead despite continued weakness: “While the economies in our primary markets have generally improved since the lows of the economic crisis, many consumers remained cautious. The recovery has not progressed at the pace or intensity consumers had hoped for. As a result, consumers remain careful about their purchases and feel the need for resourcefulness and vigilance. In this environment, it is critical for us to deliver meaningful innovation focused on consumer needs, and to differentiate our brands through effective marketing that emphasizes our products' tangible benefits and value relative to the competition.”
In fiscal 2012, management expects net sales growth of 0-2%, with the assumption that currency will not have a significant impact. They forecast EBIT to decline 7-9%, including an incremental investment of $100 million in innovation/brand building (management called 2012 “a year of investment”). Overall, it will be interesting to see whether management can manage profitable sales growth despite wide-spread economic uncertainty; with a viable alternative from off-brand competitors, CPB might continue to find weakness as they cut promotional offerings.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.