Scorching Sales Growth Propels Campbell Soup, but Challenges Heating Up; Shares a Touch Undervalued

Wide-moat Campbell Soup’s second-quarter headline appeared solid (13% organic sales growth, 30 basis points of adjusted gross margin expansion to 30.7%, and 20 basis points of adjusted operating margins gains to 14.6%), but we caution the narrative isn’t as tasty. For one, results a year ago were tepid (a 2% organic sales downdraft and 340 basis points of adjusted gross margin degradation), due to rampant inflation and supply chain angst. Further, in this year’s second quarter, pricing was the prime driver of sales growth (14%) and gross margin gains (1,020 basis points). But management commented private-label promotions in the U.S. soup aisle have stepped up, which could indicate the competitive backdrop is becoming more challenged. As such, pricing might be harder to come by and/or could compress volumes more, a quandary when juxtaposed with unrelenting inflation (as Campbell is calling for a low-teens hit this year, on top of an 11% increase in fiscal 2022).