Campbell Soup Explains Where Things Went Wrong Last Quarter

Given its recent struggles, investors had low expectations for consumer foods specialist Campbell Soup Company’s (NYSE:CPB) earnings report last week. But the results, which included a sharp drop in profitability and a $600 million impairment charge, still shocked Wall Street and sent the stock down to a new multi-year low.

Interim CEO Keith McLoughlin, who is stepping in after Denise Morrison abruptly resigned, held a conference call with analysts that sought to add context to those results and explain why Campbell Soup’s earnings picture is worsening.

Here are a few highlights from that presentation.

A bowl of soup on a table.

Image source: Getty Images.

Profits are a problem

While our organic sales were stable in a difficult environment, our challenge in the quarter was clearly our adjusted gross margin performance. — CFO Anthony DiSilvestro

Campbell Soup’s 15% revenue gain came entirely from the addition of the Snyder-Lance snacking portfolio it recently acquired. Sales were flat on an organic basis, to stay right within management’s guidance of between a 1% loss and a 1% gain for the fiscal year.

Yet the company had to sacrifice profitability to keep sales from declining. Gross profit margin dove by 4 percentage points to 32% of sales as costs rose on inputs like dairy and meat. Campbell Soup struggled to pass along those increases to consumers, and in fact average prices fell during the quarter.

Campbell Fresh is struggling

As a result of the disappointing Campbell Fresh performance, we revised the long-term forecast for that business and we recorded a $619 million pre-tax non-cash impairment charge. — DiSilvestro

The Campbell Fresh segment has been a source of painful writedowns over the last two years, but this latest charge was far larger than the $212 million hit that management took a year ago. Executives said the new writedown reflected lower expected sales, earnings, and cash flow, in part because of the loss of a major retailer contract on refrigerated soups.

The division also suffered from spiking manufacturing costs and falling carrot crop yields. “We are all disappointed with the results of Campbell Fresh,” DiSilvestro said, “and we acknowledge that they are unacceptable.”

Bright spots

The recent addition of the Snyder’s-Lance portfolio of brands and Pacific Foods… will enhance our growth potential as we expand into the faster-growing snacking categories and enhance our health and wellbeing offerings of soup and broth. — McLoughlin

The new Snyder-Lance brands lifted sales results and tilted Campbell Soup’s snacking business to just under half of its portfolio. The segment was a drag on overall profitability, though, and executives noted a few surprising costs around the merger that will likely make it a drag on earnings for fiscal 2019.

A steaming bowl of vegetable soup.

Image source: Getty Images.

McLoughlin and his team say they’re still confident that, once it is fully integrated, the new business will deliver on the optimistic goals they outlined when they announced the $4.6 billion acquisition late last year.

Looking forward

We are facing both execution-related and external challenges. We are analyzing these issues in depth, developing action plans to address them, and doing so with a heightened sense of urgency. — DiSilvestro

Campbell Soup took an axe to its profitability outlook and lowered its earnings forecast for the year, too. Management also asked investors to be patient as they conduct a full strategic review aimed at figuring out what significant changes need to be made to get the business back on track.

Shareholders will hear more details about that rebound plan in Campbell Soup’s next quarterly call in late August, executives promised. In any case, though, fiscal 2019, which begins in a few months, is likely to be a “challenging year,” according to management. That prediction keeps Campbell Soup on track for a fourth consecutive year of falling profits and suggests investors have been right to assign a low multiple to this stock.

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