Convenience food as a sector has gained excellent momentum over the past few months with the Covid-19 pandemic and the lockdowns prompting consumers all over the world to stock up on non-perishable foods.
This has led to many such convenience food manufacturers, such as Campbell Soup Company. CPB, delivering fantastic results and growth. While there are concerns that with the lockdown getting lifted, consumers have the option to pick restaurants or food deliveries over the quick and easy offerings of Campbell Soup, it is hard to rule out the fact that the work-from-home culture is here to stay for many companies. Given this backdrop, I think the company has a strong outlook for 2020.
Company overview
Campbell Soup is one of the oldest manufacturers of branded convenience food in the U.S. Founded back in 1869, the New Jersey-based company manufactures and markets a wide range of food and beverage products, most notably soup. Campbell Soup’s operations are currently spearheaded by CEO Mark Clouse, and the company has a headcount of close to 19,000 employees.
Its product range includes condensed and ready-to-serve soups, broth and stocks, non-dairy beverages, pasta sauces, Mexican sauces, gravies, pasta, beans, dinner sauces, cookies, crackers, fresh bakery and frozen products. The company owns a strong portfolio of consumer food brands such as Campbell's, Pace, Prego, Swanson, V8 and Pepperidge Farm. Its products reach the end consumer through various channels such as retail food chains, club stores, mass discounters, mass merchandisers, convenience stores, dollar stores and e-commerce.
Financial results
Campbell Soup witnessed a solid quarter in the first few months of 2020, in which it saw its overall sales rise 15% to $2.24 billion with a 17% growth in organic sales (excluding the impact of acquisitions, divestitures and currency exchange). That result beat the analyst consensus estimate of $2.22 billion
Campbell Soup saw its gross margin increase from 33.5% to 34.5%, while operating income grew as the fixed overhead costs grew slower than the total revenues. As a matter of fact, the company’s adjusted earnings per share (EPS) rose by as much as 57% to 83 cents a share, beating the analyst consensus of 75 cents by a significant margin.
The solid results made the stock price soar as the management also increased their 2020 guidance significantly. Now, the company expects a 5.5-6.5% jump in the top-line for 2020 as compared to 2019. The management was optimistic about margin expansion from the beginning of the year and had expected an 11-13% increase in the adjusted EPS, but this has now increased even further to an estimate of 25-27% and a value of between $2.87 to $2.92 per share. In fact, they believe that they can achieve cost-saving of $150 million during the course of the year.
The company also announced a quarterly dividend payout of 35 cents per share.
Consumer behavior
Campbell Soup has seen different phases of consumer behavior with respect to its product-buying trends over the past quarters. When the lockdowns started, consumers were eager to stock up on convenient, easy-to-make packaged foods like pasta, sauces, soups and so on, which led to double-digit growth in organic sales and a 35% growth in core soup sales. Since most of these items have a long shelf life and moreover, consumers did not have the option to go out to restaurants, a company like Campbell Soup had a lot to benefit from the situation.
Many consumers also preferred to buy food items directly from retailers rather than getting delivery from restaurants. The management claims to be seeing repeat purchase trends playing out, so the growth in household penetration is expected to continue. The quarter-on-quarter growth of the top-line is bound to slow down with the lockdowns ending and with restaurants and outdoor eating joints opening.
Also, summers are usually a slow phase for the company as the warm weather often prompts consumers to consume much less soup as compared to the winters.
However, with the remote working environment gaining more and more popularity, consumers working from home may be more inclined to purchase Campbell's products .
As we can see in the chart above, Campbell Soup’s stock gained excellent momentum but has flattened over the past few weeks. It is worth highlighting that the company continues to be a market leader in most of the soup categories and its other segments
While Campbell Soup did lose some market share in the core soup business despite the rising sales, it still controls 44% of the ready-to-serve soup market and 85% of the condensed soup market. The management has continued dividend payouts and expects $150 million in cost savings in 2020. Given the increase in remote working and the general health concerns of consumers for ordering food delivery, I think Campbell Soup is set for a stronger 2020 and could have a decent upside for investors.
Disclosure: No positions.
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