GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Campbell Soup: Fiscal 2011 Results

September 06, 2011 | About:
The Science of Hitting

The Science of Hitting

234 followers
Campbell Soup Company (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:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.3/5 (9 votes)

Comments

mcwillia
Mcwillia - 2 years ago
Certainly CPB must be the low cost producer, and if they truly wanted to, they could wipe out the competitors on this basis alone, couldn't they? Private label it if they must, but how can anyone produce for less, what with CPB having more plants closer to more stores and doing more volume than anyone else? Maybe the Jesse Owens 1936 strategy would be best...fall back in order to win. I mean, perhaps the vaunted brand is simply incidental. CPB could cut prices below what any competitor could match, diversify into many brands so as not to destroy the main brand, and take all parts of the spectrum, sacrificing the fat margins for the moment in order to make it up in volume and then gradually retake the premium categories with special brands, Warhol colored labels, etc. (short sightedness on wall st. would hate this, of course). If they are the low cost producer, why don't they push THAT advantage to its ultimate conclusion instead of trying to milk value out of a 100 year old brand?
The Science of Hitting
The Science of Hitting premium member - 2 years ago


"Certainly CPB must be the low cost producer, and if they truly wanted to, they could wipe out the competitors on this basis alone, couldn't they? Private label it if they must, but how can anyone produce for less, what with CPB having more plants closer to more stores and doing more volume than anyone else? Maybe the Jesse Owens 1936 strategy would be best...fall back in order to win. I mean, perhaps the vaunted brand is simply incidental. CPB could cut prices below what any competitor could match, diversify into many brands so as not to destroy the main brand, and take all parts of the spectrum, sacrificing the fat margins for the moment in order to make it up in volume and then gradually retake the premium categories with special brands, Warhol colored labels, etc. (short sightedness on wall st. would hate this, of course). If they are the low cost producer, why don't they push THAT advantage to its ultimate conclusion instead of trying to milk value out of a 100 year old brand?"

They want to keep those fat margins; the way to do that is from brand equity, which they undoubtedly have. The scenario you laid out is pretty much what happened to them; when the recession hit, they cut prices via promotional offerings, such as buy-one-get-one. The issue is that after a while, consumers didn't care what the brand was; they were only concerned with the price (thus what management is referring to when they talk about the increased elasticity of demand). So while Campbell's could get volume, they couldn't hit their margin or price expectations.

Campbell's knows that they have an enviable position in the category, and don't want to risk the long term strength of the brand by competing with private label on price alone (in which case, the market is perfectly competitive). As a result, they want to do whatever it takes to make sure that they convince the consumer that they are worth that premium.

At the end of the day, it's the same for soup, soda, potato chips, and laundry detergent. If Campbell's simply created generic soup, competitors would enter and drive down their prices until the market was eventually at a point of perfect competition. Differentiation is the key to maintaining their competitive position, an advantage that has been weakened (at least temporarily) by a tough economic environment.
batbeer2
Batbeer2 premium member - 2 years ago
If they are the low cost producer, why don't they push THAT advantage to its ultimate conclusion instead of trying to milk value out of a 100 year old brand?"

Though there are economics of scale, there are no barriers to entry. In other words, they could kill the competition on price and then they would need to keep the prices low forever. If not, local competitors pop up.

That is probably not the most profitable way to run that business. If you're the low-cost producer, use the umbrella of the less efficient players to generate better margins. That too will go on till no one eats soup anymore but now you're more profitable.

just random thoughts.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK