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Campbell (CPB) Down 6.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Campbell Soup (CPB - Free Report) . Shares have lost about 6.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Campbell due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Campbell Sees Soft Q4 Earnings, Unveils Strategic Plans

Campbell Soup posted dismal earnings in fourth-quarter fiscal 2018. Also, in a separate press release, the company announced various actions to improve its business as part of its strategic portfolio review. The company plans to divest non-key businesses including Campbell International and Campbell Fresh, which generated net sales of nearly $2.1 billion in fiscal 2018.  

Q4 Highlights

Adjusted earnings of 25 cents per share slumped nearly 52% year over year and were in line with the Zacks Consensus Estimate. The downside was led by a rise in interest expenses and adjusted tax rate, a fall in adjusted EBIT on base business as well as the dilutive effect of recent buyouts.

Incidentally, adjusted net interest expenses escalated $64 million on account of debt related to the buyout of Synder’s-Lance as well as greater average interest rates. Adjusted tax rate rose 21.8 percentage points to 59%.

Including one-time items, Campbell’s earnings came in at 31 cents per share compared with earnings of $1.04 in the year-ago quarter.

Net sales of $2,219 million surged 33% year over year, backed by gains from buyouts of Snyder’s-Lance and Pacific Foods. Organic sales dropped 3% mainly due to decline in Americas Simple Meals and Beverages unit. Also, net sales came below the Zacks Consensus Estimate of $2,243 million, which marked the company’s second consecutive top-line miss.

Moving on, the company’s adjusted gross margin contracted 5.6 percentage points to 30.6%, which included a negative impact of about 3 points from the recent buyouts. Apart from this, the gross margin contraction was accountable to cost inflation, escalated supply-chain expenses, adverse mix, increased promotional spending and impacts from the recall of flavor-blasted Goldfish crackers. This was somewhat compensated by productivity improvements and gains from cost savings.

Adjusted EBIT in the quarter remained flat at $281 million, as gains from recent buyouts were offset by softness in the base business.

Segment Analysis

Campbell reports its results under three segments namely, Americas Simple Meals and Beverages, Global Biscuits and Snacks, and Campbell Fresh. The Latin America business is managed as part of the Global Biscuits and Snacks segment starting from fiscal 2018. Earlier, this division formed part of the Americas Simple Meals and Beverages segment.

Americas Simple Meals and Beverages: In fourth-quarter fiscal 2018, sales at the division dipped 1% year over year to $789 million. Further, the segment’s organic sales were down 6% 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 greater market competition.

Global Biscuits and Snacks: Sales at this division soared 87% at $1,202 million. Excluding gains from the Snyder’s-Lance’s buyout, organic sales remained flat as strength in Pepperidge Farm cookies were negated by declines in Goldfish crackers and Arnott’s biscuits in Indonesia. Notably, Goldfish crackers sales were hurt by the voluntary recall made on Jul 23.

Campbell Fresh: Sales at this segment rose 1% to $228 million on the back of higher sales of Garden Fresh Gourmet and carrot ingredients, somewhat countered by softness in Bolthouse Farms refrigerated beverages.

Financials

Campbell ended the quarter with cash and cash equivalents of $226 million, total debt of $9,894 million and total equity of $1,373 million. Additionally, the company generated $1,305 million as net cash from operating activities in fiscal 2018.

Updates on Strategic Portfolio Review

In a separate press release, Campbell revealed various important actions it is taking in order to enhance the company’s performance and boost shareholders’ value. These actions form part of the company’s portfolio review and Board-led strategy.

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 take into consideration the expected savings of $500 million as well as synergies and run-rate cost savings of nearly $245 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.

Along with its fourth-quarter earnings release, the company provided an outlook for fiscal 2019, considering the company’s divestiture plans. Apart from providing guidance based on its current portfolio, Campbell also issued an outlook on a proforma basis (assuming the divestitures are concluded in fiscal 2019 beginning).

Fiscal 2019 Outlook

The company projects fiscal 2019 sales in the range of $9,975-$10,100 million ($7,925-$8,050 million on a proforma basis). The projections include sales of nearly $ $1,500-$1,550 million from the buyouts of Snyder’s-Lance and Pacific Foods.

Adjusted EBIT is expected in a band of $1,370-$1,410 million, while it is likely to range between $1,230 million and $1,270 million on a proforma basis.

Adjusted earnings per share are envisioned in a band of $2.45-$2.53 per share, while proforma earnings are estimated to range from $2.40 to $2.50 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.58% due to these changes.

VGM Scores

Currently, Campbell has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Campbell has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.




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