Campbell Soup Co. (CPB) shares declined on weak Q2 outlook

Campbell Soup Co. (CPB) on Thursday announced financial results for its fiscal first quarter that surpassed consensus forecast. However, its outlook for the current quarter did not match expectations, sending its shares slightly down in the previous trading session.

The Camden, New Jersey-based company reported earnings of $309 million, or $1.02 a share for the three months ended Nov. 1, significantly higher than $166 million, or 55 cents a share in the comparable period last year. Analysts on average were looking for a profit of 91 cents per share.

Revenue for the quarter came in at $2.34 billion, up from $2.18 billion in the year-ago quarter, and above consensus forecast of $2.32 billion.

If we look at the sales performance of different segments, revenue from the meals and beverages segment jumped 12 percent on a year-over-year basis. Comparatively, revenue from the snacks business rose just 1 percent in the quarter.

Campbell’s first-quarter results were mainly driven by higher demand for its soup products amid a resurgence in the Covid-19 cases that forced more people to dine at home. Moreover, supermarkets also purchased its soup products in bulk quantity in preparation for winter season.

CEO Mark Clouse said in a statement, “Our Meals & Beverages division continued to drive impressive sales and margin growth as we positioned our brands to align with macro consumer trends, and retailers rebuilt inventory for the holidays and the heart of soup season.”

The company also increased its quarterly dividend to $0.37 per share that will be payable to shareholders on February 1.

Gross margins in the quarter increased to 34.7 percent, as compared to 33.8 percent in the year-ago quarter. Moreover, marketing and selling costs rose 1 percent to $208 million.

Q2 Financial Outlook

Campbell projected adjusted earnings in the range of 81 cents per share to 83 cents per share for its fiscal second quarter, just shy of analysts’ average projection of 84 cents. Moreover, the company expects its revenue to grow in between 5-7 percent in the current quarter. On the other hand, analysts on average had estimated revenue growth of 6.5 percent.

Growth Factors

Campbell’s future growth depends on several factors including market competition, operating environment, and demand, among others. Here, we will discuss some key indicators that can drive or limit the company’s growth in future.

Competition

Campbell operates in a highly competitive market and it continuously face competition across all its segments. Several big and small rivals are competing with the company in food and beverage segments. Those competitors also include private label products manufacturers that usually sell their products at lower prices when compared to branded products.

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However, the company has been maintaining its leading position in the market through its brand recognition, innovation, the nutritional value of its products, promotions, and customer service, among others.

Capital Expenses

Campbell spent about $299 million in capital expenses during 2020. Looking forward, the company plans to spend nearly $350 million on different projects during 2021. One of the key capital projects includes implementation of an SAP ERP, which is an enterprise resource planning software that was initially planned for 2020 but the company had to delay it due to the pandemic. Another key project is a new manufacturing line for its snacks segment.

Seasonality

The demand for Campbell’s flagship soup products varies according to different seasons.

The company generates most of its revenue during the winter season. Demand for its soup products remained relatively higher as compared to the previous years, mainly driven by the Covid-19 pandemic.

Consumer Preferences

Campbell’s ability to compete in the market against rivals depends on its foreseeing power related to changing customer tastes. Moreover, there are several risks associated with the new products it introduces in the market. For instance, customers may not like the new products that can force the company to reduce prices, which will eventually hurt its profit.

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The company’s revenue-generating capacity is also expected to suffer if it is unable to foresee changing consumer preferences. In short, it continuously needs to offer a wide range of products according to the taste of customers to keep growing in the coming time.