Campbell Soup Co. (CPB) 23Q3 Update

Campbell Soup Company (CPB) reported 22Q3 EPS of $0.53 below last year’s $0.62 and my estimate of $0.61.  Net sales were $2.23 billion, 4.6% above 22Q3 and in line with my estimate.  Diluted Non-GAAP EPS was $0.68, down 3.1% YOY and a penny below my estimate of $0.69.

The GAAP earnings miss was due mostly to lower gross margin and unexpected restructuring costs.  Much of the shortfall in gross margin was attributed to restructuring and commodity mark-to-market adjustments.  The Snacks business is delivering exceptionally strong performance, driven by its eight power brands.  Meals & Beverages was up against a tough prior year comparison, due to last year’s inventory restocking by retailers, but Campbell’s expects to deliver modest volume growth once the tough comps are lapped.

The results were in line with management’s expectations.  It reaffirmed its full year fiscal 2023 guidance (with one quarter to go) of net sales growth of 8.5%-10% and adjusted non-GAAP EPS of $2.95-$3.00.  It says that the company’s performance is tracking toward the high end of the adjusted EPS range.

Even so, there are some concerns.  Substantially all of the sale gains have been due to higher prices which more than offset volume declines.  In M&B, the impact of volume declines more than offset positive price realization in the quarter.  Management also reported a pick-up in competitors’ promotional activity, as their production volumes return to pre-pandemic levels.  If it continues, Campbell may have to respond in kind by effectively walking back some of the price increases that it implemented last year.

The stock dropped sharply on the earnings report.  Since my last update (4/25), the stock has fallen 14.7%, much worse than the S&P 500’s 4.5% advance.  The decline in CPB is consistent with other food stocks, with a 12-stock peer group showing a 7.5% decline over that same period. I have reduced my 2023 GAAP EPS estimate to $2.62 (from $2.82) and non-GAAP EPS from $3.04 to $2.98.  For fiscal 2024, I now expect GAAP EPS of $2.82 and non-GAAP of $3.07, down about a nickel.  I have also reduced my price target by $4 to $54, reflecting both a drop in earnings and the valuation multiple.  Nevertheless, with the stock trading at $45.69, my revised price target represents a potential total return of 21%, so I am upgrading my rating from “3” (Neutral) to “1” (Strong BUY), even though, from a technical point of view, the stock shows no clear signs of bottoming yet.

This is a summary of my recent report on Campbell Soup Company (CPB). To obtain a copy of the full report, please reach out to me using the contact information provided below.

June 16, 2023 (Report date is June 12, 2023.)

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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