Rising at-home consumption amid the ongoing coronavirus pandemic is an upside for food industry players, including Campbell Soup Company (CPB - Free Report) . This was well reflected in the company’s fourth-quarter fiscal 2020 results, with earnings and revenues increasing double digits and cruising ahead of the Zacks Consensus Estimate.
However, the pandemic-induced rising costs have been a headwind for quite a few food companies and Campbell is no exception. During the fourth quarter, cost inflation was a headwind to the company’s gross margin performance.
That said, let’s take a closer look at the factors impacting the performance of this well-known convenience food products company.
Favorable Demand Trends
Campbell’s fourth-quarter performance was mainly steered by strong demand conditions, stemming from increased at-home consumption amid the coronavirus pandemic. We note that the company was able to increase household penetration across most key brands. This led to a 4-percentage-point increase in total company household penetration in the fourth quarter.
The trend favored the company’s top line, which rose 18% year over year. Moreover, organic sales rose 12% on the back of solid volumes in both Meals & Beverages and Snacks segments.
Management assumes that demand and supply-chain conditions are likely to stay favorable in first-quarter fiscal 2021. Accordingly, it expects net sales in the first quarter to increase in the band of 5-7% year on year.
Savings Plans Bode Well
Campbell is progressing well with its cost savings plans. During the fourth quarter, the company generated savings worth $45 million as part of its multi-year, cost-saving program, which included synergies associated with the Snyder’s-Lance buyout. With this, the company generated total program-to-date savings of $725 million. Savings generated in fiscal 2020 amounted to $165 million. Further, management continues to anticipate cumulative annualized savings from continuing operations of $850 million by fiscal 2022-end. These factors along with Campbell’s prudent investment and strategic efforts toward product innovation and brand building are likely to continue fueling profitability.
High Costs a Threat
Campbell has been struggling with cost inflation for a while. During the fourth quarter, gross margin was partly impacted by cost inflation and other supply-chain expenses (including costs associated with COVID-19). Cost inflation and other factors adversely impacted performance by 210 basis points. Overall input prices (on a rate basis) rose nearly 1.5%. Cost inflation, stemming from COVID-19, was a headwind to the company’s gross margin performance in the third quarter as well.
Further, the company undertook several marketing investments in the fourth quarter, under both Snacks as well as Meals & Beverages segments. Overall marketing and selling expenses escalated 37%, with advertising and consumer promotion expenses nearly doubling. The company plans to continue investing in marketing ventures. This is likely to put pressure on profits to some extent.
We note that shares of Campbell have declined 5.9% in the past three months against the industry’s rise of 5.6%.
Although rising costs are a roadblock for Campbell, we expect the company to sustain the odds on the back of its cost-saving actions. Moreover gains from favorable product mix, enhanced operating leverage, supply-chain enhancements and commodity hedges are also likely to help offset cost-related woes. Such upsides along with gains from a favorable demand scenario are likely to work in favor of this Zacks Rank #3 (Hold) company.
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