The U.S. is the largest market for convenience foods, and Campbell Soup Company (CPB, Financial) is one of the players in this industry with solid growth opportunity. On Nov. 24, the company reported its first-quarter 2016 results in which revenue declined by 2%, but earnings were notable. The company has delivered a third consecutive quarter of adjusted gross margin expansion with improved execution in its supply chain.
Founded in 1869, Campbell is the manufacturer of branded convenience food products like high-quality soups and simple meals, beverages, snacks and packaged fresh foods. The company’s portfolio includes Pepperidge Farm, Bolthouse Farms, Arnott’s, V8, Swanson, Pace, Prego, Plum, Royal Dansk, Kjeldsens and Garden Fresh Gourmet.
First-quarter results
During the first quarter, Campbell reported total revenues of $2.20 million, a 2% decrease compared to $2.26 million in the previous year. The adverse impact of currency translation is the main reason behind this decrease. The company’s gross margin decreased from 35.3% to 34.3%, and, excluding items impacting comparability in the current year, adjusted gross margin improved 2.6 percentage points.
During the quarter, the company’s adjusted EBIT increased 23% to $479 million, and net interest expense increased $3 million to $28 million, reflecting higher average interest rates on the debt portfolio. Campbell’s adjusted marketing and selling expenses and adjusted administrative expenses decreased 15% to $206 million and 8% to $120 million.
Segments’ performances
Campbell has introduced three new reportable segments which are as follows:
- Americas Simple Meals and Beverages: Moderate growth, consistent with categories and margin expansion.
- Global Biscuits and Snacks: Expanding in developed and developing markets while improving margins.
- Campbell Fresh: Acclerated sales growth and expansion into new packaged fresh categories.
A chart has been provided below to show the company’s segmentwise performance.
Campbell ended the quarter with cash flow from operations, capital expenditures, dividends paid and share repurchases of $218, $71, $100 and $32 (all figures are in millions). The company’s cash flow increased mainly due to higher cash earnings, partially offset by higher working capital requirements. Other strong attributes to the segment’s performance are higher gross margin percentage, volume gains and lower marketing and selling expenses.
Projections for fiscal 2016
Due to the increased negative impact of currency translation and other metrics, Campbell has revised its fiscal 2016 guidance which are as follows:
- Sales are expected to change by -1% to 0% (previously 0% to +1%).
- Adjusted EBIT is expected to grow by 4% to 7% (previously 3% to 5%).
- Adjusted EPS is expected to grow by 4% to 7% (previously 3% to 5%) or $2.75 to $2.83 per share.
- Currency translation is expected to have a three percentage point negative impact (previously negative two percentage points).
- In order to provide greater transparency into financial results, the company has adapted to change its method of accounting for its defined benefit pension and post-retirement plans.
Further, for long-term growth, Campbell has initiated a three-year, $250 million cost-saving initiative. Other initiatives are:
- It has created a new Integrated Global Services organization.
- It has launched the first phase of zero-based budgeting.
- The company is well positioned to execute against strategic imperatives.
- It is enhancing its bottom line and is taking initiatives for overseas expansion.
Management
On Sept. 29 the company announced that its board of directors has elected Les Vinney to succeed Paul Charron as chairman of the board, effective Nov. 1. Vinney, who has been a director of Campbell since 2003, retired as president and CEO of STERIS Corporation, a provider of medical supplies. Vinney’s strategic, operational and financial expertise will continue to be an asset to the board and to Campbell shareholders.
(Source: Company Website)
A peek into the convenience food industry
The convenience foods market is rising due to increasing disposable incomes which have led to higher levels of expenditure on time-saving and labor-saving food products and more women in the workforce. Followed by the U.S., other emerging markets are Asia-Pacific, Middle East and Latin America. As per Future Market Insights, the U.S., being the largest market for convenience foods in the world, will remain a strategic one for convenience food processors in the future. Further, Future Market Insights predicted that the global convenience foods market is expected to grow at a healthy rate in the next five years, though some of the emerging markets may even experience double-digit growth in significant categories.
On a concluding note
Overall, Campbell is a rock solid company with good cash flow from operations, expanding profit margins, solid stock price performance and notable return on equity. The company is also making the necessary organizational changes and managing costs to fund its growth. Recently, Campbell has been named to the Dow Jones Sustainability North America Index for the seventh consecutive year and the Dow Jones Sustainability World Index for a sixth consecutive year. With the recent quarterly release, the company is aiming for a better future and is all set to deliver a healthy menu to its investors. It is expected to create greater shareholder returns.
Disclosure: I do not hold any position in the company.
