Campbell's Top Line Continues to Cool
We don't expect the trend to abate anytime soon for this wide-moat packaged-food maker.
Sales growth has proved elusive across the packaged-food landscape over the past several quarters, and wide-moat
We’ve long held that brand investment (in terms of bringing value-added new products to market and touting that fare to consumers) is crucial to differentiating products in this competitive category, reigniting top-line performance, and supporting brand intangible assets (particularly retail relationships). However, Campbell again pulled back the reins on marketing and advertising spend (tumbling 12% to just 10% of sales, down from nearly 12% in the year-ago quarter). While this reduction contributed to a 190-basis-point expansion in adjusted operating margins to 16.9%, we don’t believe using this lever to bolster profitability is prudent for the long-term health of the business (and it may ultimately impair its retail relationships).
We intend to review our underlying assumptions and will likely ratchet our $53 fair value estimate down by a low- to mid-single-digit percentage to reflect a bleaker near-term sales outlook, but don’t foresee a material change in our long-term forecast (calling for 2% sales growth and operating margins approaching 19% by the end of our 10-year explicit forecast). While shares traded down following results, the risk/reward doesn’t strikes us as sufficient to warrant building a position at this time.
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