Campbell Beats, Retains '12 Outlook

High-quality foods and simple meals manufacturer Campbell Soup Company ( CPB - Analyst Report ) reported third-quarter 2012 adjusted earnings per share of 56 cents, surpassing the Zacks Consensus Estimate of 52 cents. However, the quarter’s results witnessed a decline of 2% from the prior-year quarter.

During the quarter, net sales remained almost flat at $1,821 million compared with the prior-year quarter, beating the Zacks Consensus Estimate of $1,812 million. Benefit from 3% spike in price and sales allowances were fully offset by negative impact from volume and mix of 1% along with 2% increase in promotional spending.

Higher input cost inflation coupled with increased promotional expenses and unfavorable mix, dragged down gross margin rate to 38.8%, a contraction of 160 basis points from the prior-year quarter level of 40.4%, partially offset by increased selling prices and productivity enhancement.

During the quarter, marketing and selling expenses grew 5% to $256 million due to increased advertising and promotional expenses, partially offset by less selling expenses. Consequently, adjusted EBIT declined 13% to $268 million compared with $307 million in the prior-year quarter, while adjusted EBIT margin contracted 220 basis points to 14.7% from 16.9% reported in the previous-year period.

Segment Analysis

U.S. Simple Meals: Third quarter sales at the U.S. Simple Meals division fell 2% year over year to $567 million, primarily due to a decline of 5% in volume and mix and 1% increase in promotional expenses, partially offset by a 4% rise in price and sales allowances. Sales of U.S. Soup dropped 3% as sales of ready-to-serve soups inched down 1% while condensed soups declined 5 %.

During the quarter, operating income plummeted 14% to $120 million compared with $139 million in the year-ago quarter, primarily due to input cost inflation, unfavorable volume mix, higher advertisement and promotional expenses, partially offset by increased pricing and enhanced productivity.

U.S. Beverages: Sales at the U.S. Beverages division rose 5% year over year to $208 million, due to a 7% rise in volume and mix, partially offset by a 2% increase in promotional spending.

However, increased input costs and higher advertisement and promotional expenses led to a year-over-year decline of 16.7% in segment’s operating income to $45 million from $54 million reported in the prior-year quarter.

Global Baking and Snacking: Campbell's Global Baking and Snacking segment sales rose 3% to $543 million. The results primarily benefited from a 6% rise in price and allowances and a 1% positive impact from currency translation, offset by a 4% increase in promotional spending.

However, input cost inflation and increased promotional expenditure led to an 11% decline in segment’s operating income to $73 million compared with $82 million in the prior-year quarter.

International Simple Meals and Beverages: Sales at International Simple Meals and Beverages inched down 1% to $349 million, primarily due to lower sales and volumes in Europe and Asia Pacific along with increased promotional spending and negative currency translation effect. However, this was partially offset by increased sales in the Canada and favorable price and sales allowances.

However, segment’s operating income declined nearly 9.8% to $37 million from $41 million in the year-ago period.

North America Foodservice: The North America Foodservice division's quarterly sales were flat year over year at $154 million. Benefit from price and sales allowances were fully offset by unfavorable volume and mix and increased promotional expenses. Operating income in the quarter decreased by $2 million to $20 million.

Outlook

Campbell retained its fiscal 2012 guidance, targeting sales growth in the 0%-2% range. The company also reiterated its adjusted earnings per share guidance of $2.35 to $2.42, reflecting a decline of 5%-7% from 2011 earnings per share of $2.54.

Campbell Soup operates in a highly competitive food industry and experiences worldwide competition in all its principal products from such well-established rivals as General Mills Inc. ( GIS - Analyst Report ) and H. J. Heinz Co. ( HNZ - Analyst Report ) .

Currently, Campbell Soup has a Zacks #3 Rank, implying a short-term ‘Hold’ rating on the stock. However, we maintain our long-term ‘Neutral’ recommendation on the stock as we believe that Campbell’s prudent investment and strategic initiatives toward product innovation and brand building will lead to an increase in its customer base and profitability.