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Campbell (CPB) to Post Q1 Earnings: Cost Woes Likely to Stay

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Campbell Soup Company (CPB - Free Report) is slated to release first-quarter fiscal 2019 results on Nov 20. This provider of branded convenience food products has a mixed earnings surprise record in the trailing four quarters, where it delivered average positive surprise of 8.8%.

Let’s see what’s in store for the company this time around.

What to Expect?

The Zacks Consensus Estimate for earnings was revised downward in the past 30 days to 69 cents, which reflects a plunge of 25% from 92 cents per share in the year-ago quarter. Nonetheless, the consensus mark for revenues is $2,677 million, reflecting close to 24% growth from $2,161 million in the year-ago quarter.

Factors Driving Campbell

Campbell is focused on taking actions related to its portfolio review and Board-led strategy. To this end, Campbell plans to draw 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 should also gain from its strategic buyouts. In this regard, Campbell concluded the buyout of Snyder's-Lance during third-quarter fiscal 2018, which marked the company’s biggest acquisition till date. Campbell is on track with Snyder's-Lance’s integration and expects to generate cost-savings and synergies of nearly $295 million from this acquisition. Prior to this, the company acquired leading organic broth and soup producer, Pacific Foods, in a drive to expand in the fast-growing organic food space. Notably, contributions from Snyder's-Lance and Pacific Foods drove Campbell’s top-line growth by 33% in fourth-quarter fiscal 2018. These factors also bode well for the quarter to be reported.

Too Many Hurdles in the Path

Though Campbell witnessed top-line growth in the fourth quarter, its organic sales went down 3%, owing to decline in Americas Simple Meals and Beverages unit. The 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. Management expects organic sales to fall slightly in fiscal 2019. 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 hurt by termination of two key private-label refrigerated soup deals. These hurdles pose threats to the company’s first-quarter show.

Further, Campbell expects its first-quarter performance to be dented by several factors. Adoption of new revenue accounting standard is expected to have a 4 cents per share negative impact in the first quarter, wherein results are also anticipated to be hurt by effects of product Goldfish recall. Additionally, the company expects U.S. soup business to remain pressurized in the first quarter.

The Zacks Consensus Estimate for Campbell Fresh sales for the quarter is pegged at $214 million compared with $234 million in the year-ago period. On the other hand, the consensus mark for sales of Global Biscuits and Snacks, and Americas Simple Meals and Beverages divisions stand at $1,248 million and $1,224 million, depicting year-over-year growth of 76% and 0.5%, respectively.

Cost Inflation a Major Worry

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 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. 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. Also, adverse portfolio mix and pricing weighed on gross margin. Gross margin softness, and higher adjusted marketing and selling expenses also weighed on Campbell’s EBIT margin.

Management expects fiscal 2019 gross margin to decline nearly 2 percentage points on account of cost inflation and unfavorable mix related to the acquired businesses. Notably, management expects cost inflation to remain high and range between 4% and 5%, stemming from the aforementioned drivers along with tariff impacts. These headwinds are likely to hit the bottom line, which is also expected to bear the brunt of higher interest expenses related to buyouts. In fact, cost inflation, which is a threat to Campbell’s first-quarter earnings, has been weighing on many other food companies like Conagra Brands (CAG - Free Report) , General Mills (GIS - Free Report) and McCormick (MKC - Free Report) .

What the Zacks Model Unveils

Coming back to Campbell, our proven model doesn’t show that the company is likely to beat bottom-line estimates this quarter.  For this to happen, the stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Campbell’s Zacks Rank #4 (Sell) combined with its Earnings ESP of -2.19% makes us apprehensive about an earnings beat. In fact, we caution against sell-rated stocks (Zacks Rank #4 or 5) going into earnings announcement.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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