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Campbell's 1Q Profits Soar

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High-quality foods and simple meals manufacturer, Campbell Soup Company (CPB) reported robust first-quarter 2013 financial results. Quarterly adjusted earnings per share came in at 88 cents and surpassed the Zacks Consensus Estimate of 85 cents. However, the quarter’s results witnessed a decline of 7.3% from 82 cents reported in the comparable prior-year quarter.

Net sales increased 8.1% to $2,336 million from $2,161 million in the prior-year quarter. However, it missed the Zacks Consensus Estimate of $2,371 million. During the quarter, sales benefited from the acquisition of Bolthouse Farms that contributed 8% to sales, as well as a 2% rise in price and sales allowances, partially offset by negative impact from 1% increase in promotional spending along with 1% currency fluctuations.

Adjusted gross margin rate of 37.9%, contracted of 160 basis points from the prior-year quarter level of 39.5%, mainly due to the acquisition of Bolthouse Farms, which has a low gross margin structure. In dollar terms, however, gross profits climbed 4% year over year to $886 million.

In the quarter, marketing and selling expenses declined 3% to $254 million mainly due to increased advertising and promotional expenses, increased selling expenses in the U.S. Soup business, partially offset by the expenses related to Bolthouse Farms.

Adjusted operating income rose 5% to $438 million compared with $416 million in the prior-year quarter, attributed to lower advertising and consumer promotion expense in the U.S. Soup business, partly offset by higher administrative expenses. However, adjusted operating margin contracted 50 basis points to 18.8% from 19.3% reported in the previous-year period. 

Segment Analysis

U.S. Simple Meals:  First quarter sales at this division grew 3% year over year to $896 million, driven by a rise of 1% in volume and mix and 2% increase in price and sales allowances. Sales of U.S. Soup jumped 2% as sales of ready-to-serve soups grew 4% and broth increased 9%, while sales of condensed soups inched down 1%. Sales of U.S. Sauces were up 4%.

During the quarter, operating income grew 5% to $274 million compared with $260 million in the year-ago quarter, primarily driven by earnings growth in U.S. Soups, partially offset declined in U.S. Sauces. Further, gains from productivity improvements, higher selling prices, and lower marketing costs were offset by cost inflation.

U.S. Beverages: Sales at this division dipped 5% year over year to $189 million. Sales declines in “V8” vegetable juice and “V8 V-Fusion” beverages, partially offset by a rise in “V8 Splash” beverages led to the fall.

However, lower volumes, offset by lower advertising and promotion expenses, resulted in flat operating profits compared to last year at $30 million.

Global Baking and Snacking: This segment’s sales inched up 1% to $574 million. The results primarily gained from a 2% rise in volume and mix and a 2% increase in price and sales allowances, offset by the 3% negative impact of increased promotion expenses.

Segment operating income declined by $3 million to $85 million compared with $88 million in the prior-year quarter, due to poor performance at Arnott’s and Pepperidge Farm, which were both impacted by higher promotional expenses.

International Simple Meals and Beverages: Sales of this segment came down 1% to $354 million, primarily due to 1% decline in volume and mix and 3% negative impact from currency translation. This was partially offset by 3% increase in price and sales allowance. Region wise, higher sales in the Asia Pacific region, Latin America and Canada were partially offset by declines in Europe.

However, higher organic sales and gross margin improvements led to a 9.3% increase in the segment’s operating income to $47 million from $43 million in the year-ago period.

Bolthouse and Foodservice: This segment comprises of Bolthouse Farms business, which was acquired on Aug. 6, 2012, and the North America Foodservice business. This division's quarterly sales dropped 3% increased to $323 million from $162 million reported for the North American business last year.

During the quarter, Bolthouse contributed $171 million to segment sales, while sales at North America Foodservices declined 6%. The decline in North American Foodservice was due to lower frozen and canned soup sales, partially offset by volume-driven gains in fresh chilled soup sold at retail.

Operating income rose by $7 million to $34 million mainly due to the acquisition of Bolthouse Farms, offset by lower earnings in North America Foodservice.

FY13 Outlook

Campbell reiterated its fiscal 2013 guidance, targeting sales growth in the 10% to 12% range. The company also maintained its adjusted earnings per share guidance of $2.51 to $2.57.

Adjusted operating income is anticipated to increase in the 4% to 6% range. Further, in fiscal 2013, Campbell expects Bolthouse Farms to contribute approximately $750 million to sales and add $0.05 to $0.07 to adjusted earnings per share.

Campbell Soup operates in a highly competitive food industry and experiences worldwide competition in all its principal products from such well-established rivals as General Mills Inc. (GIS) and H. J. Heinz Co. (HNZ).

Currently, Campbell Soup retains Zacks #3 Rank, implying a short-term Hold rating for the next 1-3 months. Moreover, we maintain our long-term Neutral recommendation on the stock.

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