Can Campbell Soup Keep Pace With Consumer Tastes?

Food giant Campbell Soup  (NYSE: CPB) is typically known as a slow-and-steady stock that provides reliable growth year to year. After all, people have to eat, and Campbell holds a large portfolio of popular food brands including its namesake soups, Pepperidge Farm and V8.
And yet, Campbell Soup is being challenged by a sudden, significant shift in consumer tastes. Americans are much more discriminating about food choices than ever before. They are increasingly opting for foods with fresh ingredients like organics, and shying away from packaged, shelf-stable items like Campbell’s products.
From Campbell Soup’s fourth-quarter earnings release on Thursday,  it’s clear those challenges aren’t going away any time soon.

Campbell’s Growth Goes Cold

For the fourth quarter, excluding non-recurring items such as charges related to cost-cutting initiatives, Campbell’s adjusted earnings per share rose to 43 cents from 41 cents a share in the year-earlier quarter. But Campbell’s revenue dropped to $1.69 billion in the quarter from $1.85 billion a year earlier.
For the year, Campbell reported an adjusted profit of $2.46 per share on revenue of $8.08 billion.
Campbell Soup’s results were boosted by price increases, but volumes fell. Weak volumes signify a deterioration in consumer demand. For instance, volumes for the U.S. beverages unit fell 4% in the fourth quarter.
Condensed soup continues to perform poorly, as sales fell 4% last quarter. Campbell Soup is getting hit hard as consumers buy less canned soup in the age of organics. To be sure, it has tried to be aggressive in responding to the changes in consumer attitudes. It operates the Plum Organics brand, which it acquired last year. Its other brands that cater to the organics trend are Bolthouse Farms and Kelsen. Kelsen also boosted the company’s presence in faster-growing markets like China.
This helped the company stay competitive in the organics space. The problem is that these brands are fairly small relative to the company’s core operations. For example, the two core segments, U.S. simple meals and global baking and snacking, represent approximately two-thirds of the company’s total sales.
Things aren’t likely to get much better in the upcoming fiscal year, and that makes matters more complicated for investors. Campbell Soup management expects flat sales, to up 1% at best.
The key takeaway from Campbell’s earnings results is that the consumer landscape can change quickly, and it’s vital for large companies to respond. It is critical for a company like Campbell Soup to prove it is not a lumbering giant that is unaware of what consumers demand.

A Steep Multiple

Campbell’s fundamentals look shaky, although the stock has performed well. The shares are up 9% since the beginning of the year. The stock has earned a reputation as a recession-resistant, slow and steady dividend stock. Indeed, the stock offers a tasty 2.6% dividend yield.
However, given Campbell’s struggles to grow sales and profit, the stock doesn’t look like a great buy. Shares trade for 20 times earnings, which is a fairly steep multiple. If the company doesn’t get its growth going in the right direction, investors may not remain bullish.

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