Campbell Soup (CPB) reported fiscal 2016 first quarter GAAP earnings of $0.62 per diluted share, compared with $0.78 in the comparable prior year period. Excluding special items, the company’s non-GAAP earnings were $0.95, compared with $0.78 last year.
Non-GAAP earnings exclude restructuring charges and related costs of $23 million or $0.07 per share and mark-to-market charges, associated with a change in accounting methodology for pension costs of $80 million or $0.26 per share.
Net sales declined 2% to $2.20 billion, but were flat after excluding the impact of foreign currency fluctuations and acquisitions. Even so, management says that sales growth has been tough to achieve in what has been a challenging and increasingly competitive business environment. Consumers remain tightfisted in the U.S., despite the steady increases in payrolls. The company also reports similar headwinds in Canada, China and Indonesia.
Management attributed the increase in non-GAAP EPS primarily to its ongoing efforts to reduce costs and improve operating efficiency. Gross margin, after excluding the mark-to-market charges, increased 5% to $834 million and as a percent of sales by 260 basis points to 37.9%. The gain was due mostly to increased efficiencies in Campbell’s supply chain, which reduced transportation and warehousing costs, but also to net price increases and reduced promotional spending.
Marketing and selling expenses, adjusted for one-offs, fell by $37 million or 15% to $206 million and as a percent of net sales by 150 basis points from 10.8% to 9.4%. The company has shifted a large portion of its marketing spending to later in the fiscal year, so some of this improvement is temporary.
Adjusted administrative expenses also fell sharply, by $11 million or 8.4% to $120 million and by about 35 basis points to 5.45% of net sales. The reduction in all three major expense categories reflects management’s efforts to pare costs to compensate for the difficult sales environment.
With the sharp improvement in non-GAAP EPS, management has raised its guidance for full year adjusted EBIT and adjusted EPS. However, the pension accounting change complicates the analysis. Previously, the company had projected fiscal 2016 EPS of $2.53-$2.58, which represented an increase of 3%-5% from fiscal 2015 adjusted EPS of $2.46. With the accounting change, fiscal 2015 results have been restated. The company’s new target of $2.75-$2.83 represents growth of 4%-7% off of restated fiscal 2015 adjusted EPS of $2.65.
Management says that the change from its prior fiscal 2016 target of $2.53-$2.58 to its new target of $2.75-$2.83 is due to (a) an increase of $0.19 per share from the accounting change; (b) a decline of $0.03 per share due to higher headwind effects from foreign currency and (c) an anticipated benefit of $0.06-$0.09 per share from improved operating performance (net of currency).
However, it is difficult to interpret Campbell’s first quarter performance against that full year guidance. In simple terms, the company reported adjusted EPS of $0.95 per share, up $0.17 from the $0.78 reported in the prior year. Yet, management’s full year fiscal 2016 guidance assumes a total increase of only $0.10-$0.18 per share from its restated fiscal 2015 adjusted EPS.
At face value, therefore, we could conclude that all of the expected improvement in fiscal 2016 adjusted EPS was achieved in the first quarter and that the remaining three quarters of fiscal 2016 will be flat at best. This raises questions about the sustainability of the improvements in cost of sales and operating expenses touted by management on the conference call.
Alternatively, it is possible that management is just being conservative about the remainder of the year; but if the first quarter profit gains are sustainable and the company does not expect any further deterioration in the operating environment, it should have raised its full year guidance by more.
Although the pension accounting changes (whereby Campbell will be recording the change in the funded status of its pension plans each quarter, instead of amortizing it over time) are mandated under accounting rules, they are serving to increase the difference between GAAP EPS and adjusted or non-GAAP EPS. Typically, a widening of this gap is cause for concern and bears watching.
Nevertheless, the market has cheered Campbell’s first quarter earnings report and bump in guidance. Its stock gapped up at the open yesterday and closed up 3.1%. So far today (the day after the earnings announcement), the stock is up another 2.3%.
At the current price around $52.50, the stock is at a more than 20 year high. It now offers a dividend yield of 2.4% and trades at about 19 times projected 2015 adjusted EPS of $2.79 and 18 times projected 2016 adjusted EPS of $2.91.
Campbell has made good progress in adjusting its business to meet the challenges of the current economic environment, but those challenges still remain and they are formidable. I believe that the stock is worth holding, but I would be reluctant to buy or add to an existing position at this time.