"Even though Campbell remains the clear market leader in soup, these results are unacceptable."
So said the CEO of Campbell Soup (NYSE: CPB), David W. Johnson, upon the company's announcement of third-quarter results. The Campbell story is nothing if not interesting. Despite the company's continuous attempts to boost soup consumption over the past decade, soup sales continue to slide lower and lower -- like being on a slide while wearing your shorts on a humid day.
In its latest quarter, the decline wasn't even that slow. Campbell reported a 9% decline in core U.S. soup consumption. If this trend continues, earnings per share for fiscal 2000 could be as much as $0.08 to $0.12 below estimates, which have been adjusted to a consensus $1.80 per share.
The question of the day is "Why?" Why do soup sales continue to slip despite Campbell's best efforts?
The answers do not lend themselves easily. Nobody knows for certain. One argument is that American culture continues to speed up, which means that even heating a can of soup takes more time than many people are willing to give it. We are eating on the run (sadly), and soup is not very portable, even in Campbell's portable containers. It's just not easy to snack on a liquid while in a hurry.
People are also eating out much more frequently for both lunch and dinner. Perhaps a declining stock market will curtail this luxury somewhat and bring inexpensive soup back in vogue. This is not a hypothesis on which to hang your investment dollars, though -- if you're counting on a weak economy to drive your stock higher, you're sort of like a snake who tries to eat itself by starting at its own tail.
Campbell hasn't turned on itself yet. On May 17, the company announced its largest new soup initiatives in its century-long history. One initiative: consumer-friendly, easy-to-open packaging of ready-to-serve soups that include the most popular flavors, chicken noodle and tomato. Look for the new packaging in July. (That's not exactly soup season, but why wait to improve?) The company also announced several new soups.
Will this be enough to finally boost sales? It is easier and easier to become skeptical. Campbell has tried so much in the past five years, but the last few quarters are among the weakest in recent memory and next quarter is not going to be a picnic, either. For the quarter just ended in April, earnings per share dropped 14% to $0.32 while net sales fell 7% to $1.4 billion. Operating earnings in the key "soup and sauce" division fell 18% on an 8% decline in sales to $926 million. (Outside the U.S., wet soup volume rose 1%.) Even sauces, such as Prego and Pace, saw decreased sales.
The only bright spot was Campbell's "Away From Home" division, where sales rose 8% to $131.5 million. Yet, even here continued investment in the new division lowered operating earnings almost 1% from last year to a paltry $12.6 million.
Not surprisingly, weak volume caused margins to drop across the board as the company shed the gains that it had made in margins over the past few years:
Q3 Ended Q2 Ended Q2 Ended
Margin 4/30/00 1/30/00 1/31/99
Gross 52.3% 55.7% 53.2%
Operating 17.5% 24.6% 20.2%
Net 9.9% 14.6% 11.9%
In the big picture, though, all is not gloomy. Campbell has the premier brand in soup and 70% market share with 90% home penetration. It also has great brands in biscuits and snacks. Finally, Campbell runs a profitable, stable business that it could probably milk and keep comfortably alive for another a whole century without too much capital expense. That wouldn't be enough to make its stock move up, though. Volume and earnings need to grow. Unfortunately, it is difficult to believe that new flip-top soup containers and new soup flavors will be enough to do the trick. After all, how can you improve on the flavors of tomato and chicken noodle?
As witness to Campbell's already depressed share price, the stock didn't react much to the disappointing quarter. At $28, Campbell trades at 15.5 times year 2000 EPS estimates and it yields a healthy dividend of 3.10%. If you want to make a lot of money for your great grandchildren 50 years from now, buying a chunk of this stock today and locking it away for a half-century might provide very successful results. But an investor can also see a scenario where that doesn't prove to be the case, and this realization is what's rather surprising and worrisome today. Ultimately, the real question is: Can Campbell beat the S&P 500 over the long haul?
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