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Will Tough Operating Backdrop Continue to Hurt Campbell?

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Campbell Soup Company’s (CPB - Free Report) performance has been dismal of late owing to volatile operating environment along with intense competition and strained margins. Consequently, the company delivered a negative surprise in recent quarters.

Campbell has lost 6.1% in the last month against the industry’s 0.2% growth. Let’s analyze the factors affecting this Zacks Rank #4 (Sell) company’s performance.

Difficult Operating Backdrop Hurts Performance

Campbell is witnessing a rough phase due to a volatile operating environment marked by rapidly evolving retail sector and increased competition. This has significantly hurt the company’s top-line performance in the recent quarters. Meanwhile, the bottom line remains strained by rise in cost inflation and higher carrot costs that have hurt the company’s Campbell Fresh (C-Fresh) division. Additionally, the rise in transportation and logistics costs due to the recent hurricanes impacted earnings in the first quarter of fiscal 2018.

As a result, the company’s first-quarter results marked the third consecutive quarter of negative earnings surprise with fourth straight revenue miss. Moreover, the company’s earnings and sales declined year over year. Organic sales dipped 2% on account of lower volumes, mainly in the Americas Simple Meals and Beverages segment.

Margins Under Pressure

Apart from hurting top- and bottom-line performance, higher costs have plagued the company’s margins. Gross margin contraction in the first quarter was mainly due to cost inflation, escalated supply chain expenses and adverse mix. Further, lower gross margin, soft sales and increased adjusted administrative costs weighed upon adjusted EBIT.

A Bearish FY18 View Raises Concerns

Given the tough environment, the company trimmed earnings guidance for fiscal 2018 while sales growth forecasts remains intact to range from negative 2% to flat. Adjusted earnings are now envisioned in the $2.95-$3.02 per share range, representing a decline of 1-3%.

Further, the company anticipates gross margin for fiscal 2018 to be comparable to last year, which is below previous expectations. This is likely to be impacted by higher transportation and logistics costs as well as the cost impact of lower carrot yields. Consequently, the company projects adjusted EBIT to decline in the range of 2-4% versus earlier guidance of decrease of 1% to increase of 1%.

Is There Hope for Revival?

Despite the above-mentioned tailwinds, the company’s strategies are directed toward achieving profitable and sustainable growth .In the meantime, Campbell remains focused on a four-point plan that encompasses raising transparency of product ingredients, portfolio diversification, developing e-commerce capabilities and strengthening presence of its growing snacks brands. Also, the company’s practice of accelerating growth by acquiring new brands bode well for long-term growth.

Do Consumer Staple Stocks Interest You? Check These

Investors interested in the sector may consider stocks such as Flowers Food Inc. (FLO - Free Report) , Lamb Weston Holdings Inc. (LW - Free Report) and Colgate-Palmolive Company (CL - Free Report) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Flowers Food delivered an average positive earnings surprise of 2.8% in the trailing four quarters. It has a long-term earnings growth rate of 6.1%.

Lamb Weston Holdings pulled off an average positive earnings surprise of 11% in the trailing four quarters. It has a long-term earnings growth rate of 5.7%.

Colgate-Palmolive came up with an average positive earnings surprise of 0.4% in the trailing four quarters. It has a long-term earnings growth rate of 7.6%.

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