1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Articles (113)  | Author's Website |

Campbell Soup - A Huge Drop by 2013?

March 07, 2012 | About:

Campbell Soup Co. (NYSE:CPB) announced its second quarter results on February 17. These pleased the market, beating consensus expectations on earnings, but missing on revenue. Earnings of $0.64 per share (expectations had centered around $0.62) showed a decline of 11% from last year’s second quarter $0.72 earnings per share. Meanwhile, revenues were 1% lower at $2.11 billion as against market estimates of $2.12 billion.

Revenues down 1% and earnings down 11%: Clearly margins are coming under pressure, but why?

Campbell Soup’s management is refocusing its business. And it expects its efforts to produce "improved sales in the second half, as we continue to shift our emphasis to brand building efforts that will drive consumer usage" as CEO Denise Morrison said in the result statement. Its turnaround strategy, after seeing continuing declines in soup sales, is to increase the quality profile of its soups whilst adding to its snack and beverage business.

Through the years, as it has tried to retain market share, Campbell has discounted its soup prices despite rising costs of its raw materials. This has led to decreasing margins, which it hopes to stem with less discounting and more price hikes. It put this strategy in place through the second quarter, and admits that this led to lower sales and product volume.

Looking at its product mix a little more closely:

  • Sales of its condensed soup rose by 5% but its higher priced ready to serve soups fell by a whopping 12%.
  • Sales of its pre-made sauces fell by 2%.
  • Baking and snacking revenue was flat.
  • Beverage revenue rose 4% as V8 vegetable juice sold well.
Having looked at Campbell’s results, I decided to look in our kitchen cupboards at home.

A few years ago, all our soups — and we eat a fair amount of soup in winter — were pre-made and ready to eat from the can. Campbell’s was one of our favorites. We now have no canned soups, and no condensed or powdered soup, either. My wife makes her own, like my mom used to. She uses left over chicken, fresh vegetables and herbs. Its better for us, and its cheaper.

My wife also now makes most of her own sauces, for many of the same reasons. The only exception I find in the kitchen cupboard is pasta sauces. Last quarter Campbell’s Prego pasta sauce sales rose 6%.

Our cupboards now have baking soda, flour, castor sugar, herbs, spice, etc. None of these were in our cupboards a few years back. My wife, like many mothers up and down the country, has chosen to turn to home baking rather than eating out of a can or package.

In view of this, it does not surprise me that Campbell’s revenues are down. Not only are cooking and eating habits changing because of health reasons, but also due to cost consciousness amongst consumers.

Raising prices will not help to promote sales. And a higher price doesn’t mean a perception of best product. In a recent survey, Campbell’s was voted as the No. 1 chicken soup; at the bottom of the pile was the most expensive brand.

Campbell has said that it will continue in its "brand-building efforts" through 2012, and expects revenue to be flat to 2% higher over the year. Brand building efforts mean more advertising and higher spending. This last quarter, the company increased advertising spend on its soup business by 2%. Sales fell. Higher spending on its advertising and brand building has not stopped shoppers turning away from the product or being turned off by increasing prices.

I fear that investors in Campbell Soup will be in for a nasty shock at the end of the year. Consumers' habits are changing — so should those of Campbell Soup shareholders. At $33, the shares trade on a trailing price to earnings ratio of 13.66, and with last year’s dividend of $1.16, yield 3.5%. However, Campbell’s strategy of increasing advertising spend and increasing prices is proving hard to manage. It’s likely to do so going forward. Margins may improve on the sales made, but if sales decrease then increased margins mean nothing. I expect estimates of $2.36 earnings per share this year to be missed. SELL.

About the author:

Buy low and sell high is easier in theory than in practice– and that’s where we come in.

At Investment Underground, our editors are disciplined, independent thinkers who will inform you when to buy undervalued investments, recognize catalysts, and sell when full value is realized. We provide timely, detailed analysis of our value investing strategies and help you achieve your goals of a reduced-risk trading environment.

If you are fed up with volatile markets and manipulation that put your financial well-being in jeopardy, join us to achieve those gains you deserve without the headache.

Visit InvestmentUnderground's Website

Rating: 3.8/5 (9 votes)


Please leave your comment:

GuruFocus has detected 2 Warning Signs with Campbell Soup Co $CPB.
More than 500,000 people have already joined GuruFocus to track the stocks they follow and exchange investment ideas.

Performances of the stocks mentioned by InvestmentUnderground

User Generated Screeners

pbarker46Dividend Growth
doug.quailLong Term Candidates
bjackscreener nou 3
bjackscreener nou 2
bjackscreener nou
pbarker46Begin here 3
DBrizan2017sep22 1045p
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)

GF Chat