Scorching Sales Growth Propels Campbell Soup, but Challenges Heating Up

Wide-moat Campbell Soup’s CPB 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).

But Campbell isn’t sitting still. It is also working to reduce complexity, beef up automation, and optimize its supply chain and manufacturing network—worthy endeavors as it strives to unlock $1 billion in cost saves by fiscal 2025 (with $870 million realized to date). Further, we’re encouraged Campbell remains committed to leveraging technology, data insights, and artificial intelligence to bring consumer-valued innovation to market in a timely fashion. In this vein, we expect it to direct 5% of sales (around $500 million) on average annually to research, development, and marketing through fiscal 2032.

In light of first-half marks, management edged up its full-year outlook (8.5%-10% sales growth and $2.95-$3.00 in adjusted EPS); our preprint estimates will likely move within the revised ranges, but we don’t anticipate any material change to our long-term outlook (around 2% organic sales growth and high-teens operating margins), which should negate a shift in our $55 fair value estimate (beyond time value).