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Can Campbell's Plans Post Strategic Review Revive the Stock?

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Campbell Soup Company’s (CPB - Free Report) performance has long been eclipsed by weakness in its U.S. Soup business, volatile Campbell Fresh (C-Fresh) performance and strained gross margin. These factors, which lingered in fourth-quarter fiscal 2018, have caused this Zacks Rank #5 (Strong Sell) stock crash 13.2% in a year compared with the industry’s drop of 2.1%.

Nevertheless, the company recently unveiled various important actions it is undertaking as part of its prudent portfolio review and Board-led strategy. These moves are aimed at enhancing the company’s performance and boosting shareholders’ value. That said, let’s delve into these strategic endeavors and see if they can help revive Campbell’s dwindling stock.

Strategic Review Leads to Raised Savings Target     

Markedly, Campbell plans to bring focus on two separate businesses in its key North American market — Campbell Snacks, and Campbell Meals and Beverages. Further, the company plans to divest non-key businesses — Campbell International (which includes Arnott’s and the Kelsen Group) and Campbell Fresh — to sharpen focus and enhance portfolio. The company plans to utilize proceeds from the sale of these businesses (which generated net sales of nearly $2.1 billion in fiscal 2018) to curtail debt considerably.

Banking on a more focused portfolio, management raised its cost-savings target for 2022 by $150 million to $945 million. The incremental savings are likely to come on the back of Campbell Soup’s efforts to streamline its structure, augment its zero-based budgeting endeavors and maintaining focus on manufacturing network optimization. The updated savings target continues to reflect expected savings of $500 million as well as synergies and run-rate cost savings of nearly $295 million from Synder’s-Lance’s integration.

Considering all factors, Campbell revised its targets for the long term, wherein it expects organic sales to grow 1-2%, adjusted EBIT to increase 4-6% and adjusted earnings to rise 7-9%. Further, management anticipates net debt to adjusted EBITDA ratio for 2021 to be 3.0x. Notably, these goals consider the closure of the planned sale of Campbell International and Campbell Fresh.

Can These Efforts Uplift the Stock?

Campbell’s plans reflect the company’s strategy of shifting focus away from not so impressive businesses to areas with solid growth potential. Incidentally, Campbell has posted negative sales surprise in six of the past seven quarters including the fourth quarter of fiscal 2018, wherein soft U.S. Soup business remained a major hurdle.

During the quarter, Americas Simple Meals and Beverages unit witnessed a 6% drop in organic sales, mainly due to softness across U.S. Soup and Canadian sales. Excluding gains from the Pacific Foods buyout, U.S. Soup sales tumbled 14% on account of lower sales of condensed soups, broth and ready-to-serve soups. U.S. Soup sales were hampered by intense competition and reduced promotional activities. Though the company is making efforts to improve trends in the U.S. Soup business, it is likely to decrease in fiscal 2019. Apart from this, management also expects Campbell Fresh sales to be negatively impacted by termination of two key private-label refrigerated soup deals.

Moving to cost savings, it should help the company offset cost inflation and serve as a breather for margins. Markedly, Campbell has been witnessing strained margins for a while now. In fourth-quarter fiscal 2018, the company’s adjusted gross margin contracted 5.6 percentage points due to impacts from recent buyouts, cost inflation, escalated supply-chain expenses, adverse mix, increased promotional spending and effects of product recall. The cost inflation stemmed from increased prices of dairy, steel cans, meat and resins along with greater-than-expected rise in transportation and logistics expenses. Unfortunately, management expects cost inflation to remain high, which along with unfavorable mix is expected to hurt gross margin in fiscal 2019.

So, let’s see if Campbell’s focus on the aforementioned plans can help it mitigate the hurdles and uplift the stock.

Unsure About Campbell? Check These Solid Food Stocks

Medifast (MED - Free Report) , with a Zacks Rank #1 (Strong Buy), delivered positive earnings surprise in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 22%, carries a Zacks Rank #2 (Buy).

Pinnacle Foods has long-term earnings per share growth rate of 8% and a Zacks Rank #2.

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