Campbell Soup Co aims to realize around $1 billion in savings through fiscal 2025

Business Strategy and Outlook

To say CEO Mark Clouse’s three-year tenure heading up Campbell Soup has been fraught with change might be considered an understatement. Since January 2019, Campbell has parted ways with its fresh business and the bulk of its international operations and worked to steady its core meals, beverages, and snacking arms, while navigating a global pandemic. But it doesn’t attribute its recent performance (14% consumption growth on a three-year stack basis) as merely a by-product of heightened consumer stock-ups of essential fare since March 2020. Rather, it’s likely, management’s strategic agenda–anchored in funnelling additional investment across its operations–fuelled by its pursuit of extracting inefficiencies has set Campbell on a sound course. And while much consternation rightly centres on how the business is poised to emerge in a post-COVID-19 world, it is held the steps that had been underway to steady the business and to juice its sales trajectory before the pandemic should serve as a springboard against a more normalized demand environment.

Campbell is also battling unrelenting raw material inflation (which management now anticipates will prove a double-digit percentage hit in fiscal 2022), though it’s not sitting still. As a means to offset these pressures, Campbell is raising prices across its mix (with its third round of pricing set to hit shelves in August). Further, the firm aims to realize around $1 billion in savings through fiscal 2025 (up from $850 million by the end of fiscal 2022), with a focus on reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network, which strikes us as achievable. But despite these near-term pressures, it’s unsurmised brand spending will contract. Rather, management has suggested its intent to funnel a portion of any savings realized behind its brand mix (in the form of both R&D as well as marketing), supporting the intangible asset that underpins its wide moat. This aligns with foreseeable calling for research, development, and marketing to edge up to 7% of sales over the next 10 years (or about $650 million annually), above the 6% expended the past three years on average ($500 million).

Financial Strength

It is unlikely that a lack of financial flexibility will encumber Campbell’s prospects against the current backdrop, with free cash flow as a percentage of sales amounting to 9% in fiscal 2021. Even though Campbell opted to raise $1 billion in 10- and 30-year bonds in April 2020, the firm has been making good on its commitment to lower its debt balance, with net debt/adjusted EBITDA standing at 2.6 times at the end of fiscal 2021, down from 4.9 times at the end of fiscal 2019 and 3 times when the books closed on fiscal 2020. From analyst’s viewpoint, after hitting its leverage targets, Campbell could be warming to a deal, though it is alleged that its aims are likely anchored in smaller, bolt-on tie-ups (as opposed to larger, transformational deals that could shoulder it with an increased debt load once again). In this context, management’s rhetoric suggests that it isn’t angling for an acquisition that would compromise its ability to reinvest in its business. Further, a mid-single-digit growth in its dividend each year over expert’s forecast, with its dividend pay-out holding around 50% of earnings on average annually (currently yielding around 3%), is expected. It is also foreseen Campbell will repurchase around 2% of shares on average each year, which is likely to be prudent use of cash when shares trade at a discount to analyst’s assessment of intrinsic value.

Bulls Say’s

Removing excess costs should afford Campbell the fuel to invest in its brands, nearly one dozen of which generate more than $100 million in sales each year.
Campbell’s innovation focus (leveraging technology, data insights, and artificial intelligence to aid its efforts to bring consumer-valued new products to the shelf in a timely fashion) is attracting new consumers to the aisle and its product mix.
About half of Campbell’s sales result from the faster growing on-trend snack aisle, which stands to offset more muted long-term prospects for the mature soup category.

Company Profile

With a history that dates back around 150 years, Campbell Soup is now a leading manufacturer and marketer of branded convenience food products, most notably soup. The firm’s product assortment includes well-known brands like Campbell’s, Pace, Prego, Swanson, V8, and Pepperidge Farm. Following the sale of its international snacking operations, which wrapped in calendar 2019, the firm derives nearly all of its sales from its home turf. Campbell has made a handful of acquisitions to reshape its product mix the past few years, including the tie-up with Snyder’s-Lance (completed in March 2018), which enhances its exposure to the faster-growing on-trend snack food aisle, complementing its Pepperidge Farm line-up.

(Source: MorningStar)

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