Company Reports

Wide-moat Campbell has orchestrated significant changes since CEO Mark Clouse took the helm in January 2019. For one, the portfolio mix has shifted quite dramatically, such that its core soup lineup now accounts for only around one quarter of total sales (down from more than 40% in fiscal 2017) while snacks make up around 50% (up from less than 30%). In addition, the firm has worked to drive efficiencies across its supply chain and manufacturing network to fuel spending behind its brands and capabilities to solidify its competitive edge. These efforts have manifested in 3% average annual organic sales growth over the past five years against mid- to high-teens adjusted operating margins.

Wide-moat Campbell Soup has orchestrated significant changes since CEO Mark Clouse took the helm in January 2019. For one, the portfolio mix has shifted quite dramatically, such that its core soup lineup now accounts for only around one quarter of total sales (down from more than 40% in fiscal 2017) and snacks makes up around 50% (up from less than 30%). In addition, the firm has worked to drive efficiencies across its supply chain and manufacturing network to fuel spending behind innovation and marketing to solidify its standing with retailers and consumers. These efforts have manifested in 3% average annual organic sales growth over the past five years against mid- to high-teens adjusted operating margins.

We think the market’s tepid reception to wide-moat Campbell Soup’s seasonally small fourth-quarter results (with the stock price down about 1% in intraday trading) overlooks the continued strides the business is making. For one, even though organic sales edged down 1%, volumes ticked up 1%, an improvement from flat and down 2% in the fiscal third and second quarters, respectively. And we surmise further volume gains should manifest as Campbell works to leverage its financial resources, data analytics, and entrenched retail relationships to drive distribution gains for the recently acquired Sovos Brands and its premium lineup of Italian sauces.

CEO Mark Clouse’s tenure has been fraught with change since joining Campbell Soup in January 2019. The company parted ways with its fresh business and the bulk of its international operations while working to steady its core meals, beverages, and snacking arms. While the global pandemic and inflation have had an impact, we don’t think recent performance (organic sales up low- to mid-single-digits on a two-year stacked basis) is a byproduct of stepped-up consumer stockups of essential fare and recent price hikes to dull inflation's sting. Rather, we think Campbell’s strategic focus has set it on a sound course, leveraging technology, data insights, and artificial intelligence to bring consumer-valued products to market in a timely fashion while reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network. In addition, we expect Campbell will continue to pursue inoragnic opportunities within its core strengths to unlock fresh consumer insights and complement its mix.

While the market wasn’t enamored with wide-moat Campbell Soup’s lukewarm results in its third fiscal quarter (with shares off a touch)—likely due to concerns surrounding macro and competitive pressures—we saw some green shoots. First, despite flat net organic sales of $2.2 billion, this came on the heels of sequential volume improvement (flat in the quarter, from a 2% decline in the second quarter). In addition, the recently acquired Sovos Brands (which officially came under the Campbell umbrella in March) boasted strong top-line momentum across its sauces, soups, and frozen pizza mix; we think this business stands to benefit from Campbell’s financial resources and entrenched retailer relationships, which should spur additional distribution gains as the integration progresses. Further, supply chain productivity and cost savings more than offset the impact of cost inflation (a 240-basis-point drag), resulting in a 30-basis-point uptick in adjusted gross margin (to 31.2%). When taken together, our $61 fair value estimate and long-term outlook (low-single-digit organic sales growth and high-teens operating margins) shouldn’t see a material change, rendering shares attractive, trading at a 30% discount to our intrinsic valuation.

CEO Mark Clouse’s tenure has been fraught with change since joining Campbell Soup in January 2019. The company parted ways with its fresh business and the bulk of its international operations while working to steady its core meals, beverages, and snacking arms. While the global pandemic and inflation have had an impact, we don’t think recent performance (6% organic sales growth on a two-year stacked basis) is a byproduct of stepped-up consumer stockups of essential fare and recent price hikes to dull inflation's sting. Rather, we think Campbell’s strategic focus has set it on a sound course, leveraging technology, data insights, and artificial intelligence to bring consumer-valued products to market in a timely fashion while reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network. In addition, we expect Campbell will continue to pursue inoragnic opportunities within its core strengths to unlock fresh consumer insights and complement its mix.

We surmise Campbell’s disciplined approach to enhance operational efficiencies was emphasized in its fiscal 2024 second-quarter results—adjusted gross margin ticked up 70 basis points (to 31.4%) against a 1% drop in organic net sales (to $2.5 billion). Specifically, the combination of surgical pricing, productivity improvements, and cost savings more than offset inflation, which was a 310-basis-point drag. We don’t anticipate the firm will deviate from its course; instead, we believe Campbell remains committed to extracting inefficiencies from its supply chain and distribution network, optimizing direct-to-store routes, and investing in automation. Importantly, we believe a portion of these efficiency gains will be redeployed to buoy brand investments, which we view as integral to maintaining its brand strength and retailer relationships (the crux of our wide moat rating). This underpins our long-term prospects for the business, which include low-single-digit annual organic sales growth and high-teens operating margins.

CEO Mark Clouse’s tenure has been fraught with change since joining Campbell Soup in January 2019. The company parted ways with its fresh business and the bulk of its international operations while working to steady its core meals, beverages, and snacking arms. The global pandemic and inflation have also had an impact. However, we don’t think recent performance (7% compound annual growth in organic sales) is just a byproduct of stepped-up consumer stockups of essential fare and recent price hikes to dull inflation's sting. Rather, we think Campbell’s prudent strategic focus has set it on a sound course, leveraging technology, data insights, and artificial intelligence to bring consumer-valued products to the shelf in a timely fashion while also reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network.

Amid a weak consumer spending backdrop and an intensifying competitive landscape, wide-moat Campbell Soup eked out solid performance in its fiscal first quarter. Organic sales ticked down 1%, but this mark looks more impressive when accounting for the 15% growth it was lapping in the year-ago period (amounting to a 7% CAGR on a two-year stacked basis).

Campbell Soup posted fair results in its seasonally small fourth quarter (5% organic sales and a 180-basis-point pullback in adjusted operating margin to 11.7%). But these were overshadowed by the implications of its fiscal 2024 outlook—organic sales flat to up 2% and $3.09-$3.15 in adjusted EPS, which generally square with our respective 1.4% and $3.03 preprint estimates. To be sure, Campbell is facing stepped-up competitive intensity amid a weakening consumer spending backdrop that could weigh on near-term sales and profits, but cost pressures appear to be abating, with management calling for just low-single-digit inflation this year (on top of double-digit increases each of the past two years).

As concerns surrounding the consumer spending backdrop reverberate throughout the consumer packaged goods industry, wide-moat Campbell Soup opted to buoy its prospects by bringing Sovos Brands (around 10% of total sales, the owner of Italian sauce brand Rao’s Homemade) into the fold. The $2.7 billion price tag ($23 per share, a 28% premium to Aug. 4’s closing price) strikes us as a touch rich, corresponding to 20 times adjusted EBITDA and nearly 15 times including targeted synergies of about $50 million (about a mid-single-digit percentage of Sovos’ cost of goods sold and operating expenses).

CEO Mark Clouse’s tenure has been fraught with change since joining Campbell Soup in January 2019. The company parted ways with its fresh business and the bulk of its international operations while working to steady its core meals, beverages, and snacking arms. The global pandemic and inflation have also had an impact. However, we don’t think recent performance (20% consumption growth on a three-year stack basis) is just a byproduct of stepped-up consumer stockups of essential fare since March 2020. Rather, we think Campbell’s prudent strategic focus has set it on a sound course, leveraging technology, data insights, and artificial intelligence to bring consumer-valued products to the shelf in a timely fashion while also reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network.

The market soured on wide-moat Campbell Soup even after it posted decent third-quarter marks—5% organic sales growth and 60 basis points of adjusted gross margin degradation to 30.9%—as seen by the 8% rout in shares. We attribute the reaction to concerns surrounding the competitive backdrop (which management suggested has gotten more promotional) and the state of consumer spending (which has weakened). But the firm appeared unmoved, reaffirming its outlook for 8.5%-10% sales growth and $2.95-$3.00 in adjusted EPS, which square with our 9.4% and $2.96 respective preprint estimates. We don’t expect to alter our $58 fair value estimate (beyond time value) or our long-term forecast (low-single-digit sales and high-single-digit adjusted EPS growth) but now view shares as attractive, trading at a 20% discount to our valuation.

Since joining Campbell in January 2019, CEO Mark Clouse’s tenure has been fraught with change. Not only has Campbell parted ways with its fresh business and the bulk of its international operations while also working to steady its core meals, beverages, and snacking arms, it has also navigated a global pandemic. But we don’t attribute its recent performance (20% consumption growth on a three-year stack basis) as merely a byproduct of heightened consumer stock-ups of essential fare since March 2020. Rather, we think Campbell’s prudent strategic focus (leveraging technology, data insights, and artificial intelligence to bring consumer-valued new products to the shelf in a timely fashion while also reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network) has set it on a sound course.

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).

Since joining Campbell in January 2019, CEO Mark Clouse’s tenure has been fraught with change. Not only has Campbell parted ways with its fresh business and the bulk of its international operations while also working to steady its core meals, beverages, and snacking arms, it has also navigated a global pandemic. But we don’t attribute its recent performance (21% consumption growth on a three-year stack basis) as merely a byproduct of heightened consumer stock-ups of essential fare since March 2020. Rather, we think Campbell’s prudent strategic focus (leveraging technology, data insights, and artificial intelligence to bring consumer-valued new products to the shelf in a timely fashion while also reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network) has set it on a sound course.

On the surface, wide-moat Campbell Soup delivered a strong start to the fiscal year—15% organic sales growth and just a 30-basis-point drop in adjusted gross margins to 32.2% (as pricing and cost savings were unable to offset pronounced inflation, up 18% in the quarter, lower volumes, and unfavorable mix); shares shot up a mid-single-digit percentage. However, we take a more tempered view, as Campbell was lapping bleak year-ago results, during which sales slumped 4% (on account of lower retail inventories that are now building back) and gross margins compressed 200 basis points.

Since joining Campbell in January 2019, CEO Mark Clouse’s tenure has been fraught with change. Not only has Campbell parted ways with its fresh business and the bulk of its international operations while also working to steady its core meals, beverages, and snacking arms, it has also navigated a global pandemic. But we don’t attribute its recent performance (14% consumption growth on a three-year stack basis) as merely a byproduct of heightened consumer stock-ups of essential fare since March 2020. Rather, we think management’s strategic agenda--anchored in funneling additional investment across its operations--fueled by its pursuit of extracting inefficiencies has set Campbell on a sound course. And while much consternation rightly centers on how the business is poised to emerge in a post-COVID-19 world, we think the steps that had been underway to steady the business and to juice its sales trajectory before the pandemic should serve as a springboard against a more normalized demand environment.

In our view, the market had little concern for wide-moat Campbell’s seasonally small July-ended fourth quarter (6% organic sales growth and 40 basis points of adjusted gross margin expansion to 31.3% despite an 810-basis-point drag from higher commodity costs), hankering instead for perspective on the competitive and macro landscape. And in this context, we think management expressed some caution, citing increased trade down to lower-priced private-label fare (particularly in condensed soup and broth) and stepped-up promotional spend (relative to the depressed levels that have been customary since COVID-19 hit). Further, Campbell foresees continued inflationary angst, amounting to a low-teens rate in fiscal 2023 on top of the 11% absorbed in fiscal 2022. However, we never anticipated that consumers would continue to digest the rash of price hikes across the grocery store without a bit of indigestion, nor did we posit promotions were a thing of the past. We also surmise that Campbell is pursuing multiple avenues through which to withstand inflation (increasing prices, extracting inefficiencies, and altering price/packs), which we see as prudent.

To say CEO Mark Clouse’s three-year tenure heading up Campbell Soup has been fraught with change might be considered an understatement. Since January 2019, Campbell has parted ways with its fresh business and the bulk of its international operations and worked to steady its core meals, beverages, and snacking arms, while navigating a global pandemic. But we don’t attribute its recent performance (14% consumption growth on a three-year stack basis) as merely a byproduct of heightened consumer stock-ups of essential fare since March 2020. Rather, we think management’s strategic agenda--anchored in funneling additional investment across its operations--fueled by its pursuit of extracting inefficiencies has set Campbell on a sound course. And while much consternation rightly centers on how the business is poised to emerge in a post-COVID-19 world, we think the steps that had been underway to steady the business and to juice its sales trajectory before the pandemic should serve as a springboard against a more normalized demand environment.