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.
The company has posted mixed quarterly results, including a 1% decrease in total revenue. In fiscal 2016, Campbell has changed the method of accounting for the recognition of actuarial gains and losses for defined benefit pension and post-retirement plans and the calculation of expected return on pension plan assets. Further, in the second quarter of 2016, it has incurred a pretax gain of $7 in unallocated corporate expenses due to mark-to-market adjustments.
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.
Mixed second quarter results
On Feb. 25 Campbell reported second-quarter and six months results for fiscal 2016 ended on Jan. 31. The company’s total revenues decreased 1% to $2.20 billion, compared to $2.23 billion for the comparable prior-year period. Gross margin increased from 33.3% to 37.2% and, excluding items impacting comparability in the current year, adjusted gross margin improved four percentage points.
The company’s EBIT increased 23% to $414 million, compared to $337 million in the prior year period. Adjusted EBIT increased 26% to $423 million, compared to $337 million in the same period a year ago. Campbell’s diluted EPS for the reported quarter was 85 cents compared to 71 cents for the prior-year period. Adjusted diluted EPS was 87 cents.
Marketing and selling expenses decreased 7% to $223 million and adjusted marketing and selling expenses decreased 5% to $226 million. Further, administrative expenses increased 8% to $146 million and adjusted administrative expenses increased 6% to $143 million. Campbell’s net interest expense for the reported quarter increased $2 million to $27 million, reflecting higher average interest rates on the debt portfolio.
Campbell ended the quarter with cash and cash equivalents of $306 million, compared to $201 million for the comparable prior-year period. Long-term debt remained flat to $2.55 billion and total debt decreased to $3.84 billion compared to the prior-year period.
Attributes for the second-quarter results
- Total revenue decreased primarily due to lower volume and the adverse impact of currency translation.
- Adjusted gross margin increased mainly due to productivity improvements, higher selling prices, lower promotional spending and improved supply chain performance.
- Decreases in adjusted marketing and selling expenses are driven by cost savings initiatives, partly offset by higher advertising and consumer promotion expenses.
- Adjusted administrative expenses increased due to higher incentive compensation costs compared to the prior year, partly offset by the benefits from cost savings initiatives.
The chart below shows the company’s segments' performances.
Six months ended results
Campbell’s total revenues for the six months decreased 2% to $4.40 billion, compared to $4.49 billion for the comparable prior-year period. EBIT for the reported period was $729 million and adjusted EBIT increased 24% to $902 million compared to $726 million in the prior-year period.
The company’s adjusted diluted EPS increased 21% to $1.82, compared to $1.50 for the comparable prior-year period. Net interest expense increased $5 million to $55 million and cash flow from operations increased to $727 million from $584 million a year ago.
Projections for fiscal 2016
Due to the increased negative impact of currency translation and other metrics, Campbell has revised its fiscal 2016 guidance as follows:
- Sales are expected to change by -1% to 0%.
- Adjusted EBIT is expected to grow by +10% to +13% (previously 4% to 7%)
- Adjusted EPS is expected to grow by +9% to +12% (previously 4% to 7%) or $2.88 to $2.96 per share.
Further, for long-term growth, Campbell has already initiated a three-year cost-saving program which is performing better than expected. Therefore, it has raised its 2018 target to $300 million from $250 million.
For Americas Simple Meals and Beverages segment, the company is focused on price realization, including optimizing promotion spending, and supply chain improvements.
For Global Biscuits and Snacks segment, Campbell is expanding in developed and developing markets with improving margins.
The Campbell Fresh segment is accelerating sales growth and expanding into new packaged fresh categories.
Management
On Feb. 29 Campbell announced that its board of directors elected Keith R. McLoughlin as a member of the board, effective Feb. 24. McLoughlin has deep experience in the consumer durable goods industry and a solid track record of reshaping businesses to respond to consumer needs. Appointing McLoughlin will help Campbell to strengthen its position.
(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, the 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
Campbell is a rock solid company with good cash flow from operations, expanding profit margins, solid stock price performance and notable return on equity. Over the last 12 months, the company has implemented necessary organizational changes and managing costs to fund its growth and now, it is well-positioned to execute its strategies and to invest in the areas of its business that hold the greatest potential.
Recently, Campbell’s Culinary & Baking Institute revealed 10 influential food trends for 2016. Finally, 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.
