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Campbell Gains on Buyouts & Snacks Unit, U.S. Soup Sales Soft

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Campbell Soup Company (CPB - Free Report) appears to be a preferred pick, given this convenience food products provider’s dedicated efforts to strengthen brand portfolio through buyouts and other strategic initiatives. Further, the company is undertaking cost-saving endeavors and shifting focus to areas with higher growth potential. These efforts are likely to help the company counter hurdles like escalated cost woes and soft U.S. soup sales.

Markedly, Campbell has rallied close to 15% in the past six months compared with the industry’s growth of 2.5%. Let’s delve deeper and see how this Zacks Rank #3 (Hold) stock is positioned.

Recent Strategic Actions Bode Well

Campbell is taking various important actions to enhance the company’s performance and boost shareholders’ value. These actions are 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. Incidentally, the company has been struggling with its C-Fresh segment for a while now. During the first quarter, C-Fresh sales slipped 1% to $232 million on account of softness in Garden Fresh Gourmet and Bolthouse Farms refrigerated beverages.

Coming back to the divestiture plans, the company intends to utilize proceeds from the sale of the aforementioned businesses to curtail debt considerably. Banking on a more focused portfolio, management now targets cost-savings of $945 million by 2022. 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 maintain focus on manufacturing network optimization. During the first quarter of fiscal 2019, Campbell generated savings worth $45 million as part of its multi-year cost-savings program, which included synergies associated with Snyder’s-Lance’s buyout.

Snacks Business — a Key Driver

Talking of increasing focus on more profitable businesses, Campbell plans to channelize its portfolio toward the fast-growing snacking category, which is expected to form about half of Campbell’s proforma sales in future. Markedly, Campbell acquired Snyder's-Lance in the third quarter of fiscal 2018. This acquisition will help Campbell create a distinguished snacking business and enhance performance of the global biscuits and snacks portfolio. Such constant efforts to expand the snacking category have also helped the company’s global biscuits and snacks business perform well. Evidently, sales at this division surged 77% to $1,218 million during the first quarter of fiscal 2019, forming 45% of the company’s top line.

Buyouts Bolstering Performance

Campbell is keen on making acquisitions to enhance its brand portfolio and accelerate future growth. The Snyder's-Lance acquisition marked the company’s biggest acquisition till date. Prior to this, the company acquired leading organic broth and soup producer, Pacific Foods to expand in the fast-growing organic food space. Notably, contributions from Snyder's-Lance and Pacific Foods drove Campbell’s top-line growth of 25% in first-quarter fiscal 2019, wherein sales declined 3% on an organic basis.

Hurdles Likely to be Offset

Campbell has been witnessing strained margins for a while now. In first-quarter fiscal 2019, the company’s adjusted gross margin contracted 4.9 percentage points to 31.6%, owing to impact from recent buyouts, cost inflation, escalated supply-chain expenses and increased promotional spending. The cost inflation stemmed from increased prices of dairy, steel cans, wheat, vegetables and resins along with continued rise in transportation and logistics expenses. Also, adverse portfolio mix and higher distribution costs weighed on gross margin. Management expects fiscal 2019 gross margin to decline nearly 2 percentage points due to cost inflation and elevated promotional expenditure.

Campbell has also been suffering from soft U.S. soup sales, which declined 6% in the first quarter (excluding gains from the Pacific Foods buyout and impacts from the changes in revenue recognition). This was accountable to lower sales of condensed soups and ready-to-serve soups. U.S. soup sales were hampered by greater market competition and promotions. Though the company is making efforts to improve trends in the U.S. soup business, it is likely to decline in fiscal 2019.

Nevertheless, Campbell’s focus on areas with better prospects, solid cost-saving efforts and other growth drivers are likely to help the company offset these hurdles and sustain momentum.

Don’t Miss These Solid Food Stocks

Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 19%, carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

United Natural Foods (UNFI - Free Report) has long-term earnings per share growth rate of 7.2% and a Zacks Rank #2.

Lamb Weston (LW - Free Report) , with a Zacks Rank #2, has long-term earnings per share growth rate of 11%.

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