Campbell Soup Perks Up? [Drip] February 18, 2000

Campbell Soup Perks Up?
Q2 results top expectations

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By Jeff Fischer (TMF Jeff)
February 18, 2000

The world's largest soup company, Campbell Soup (NYSE: CPB), reported second quarter 2000 results that showed bubbling improvement over the previous year's results, although that wasn't a formidable task.

The year before this one, soup sales were down due to warm weather. Plus, the poor results were exacerbated by a re-engineering of Campbell's inventory system at the time. Largely to Campbell's credit, the company has now significantly decreased the amount of soup sold into the channel monthly (amounting to less stockpiling at stores) and it has ended its month-end promotions that decreased profit margins.

With these changes and others in place, Campbell is apparently beginning to see additional cost savings from literally years worth of divestitures, restructuring, and refocusing. Cost savings, if they're going to come in earnest, should arrive rather naturally at the "new" company, though. Therefore, the focus is still keenly on growing soup volume.

Soup consumption fell 2% in the United States in the quarter ended January 30, 2000, due to weakness in condensed soup sales. However, Campbell's soup and sauce division increased sales 7% to $1.4 billion before the impact of currencies, due largely to strong sales of ready-to-serve soup.

Worldwide wet soup shipments (not powered or condensed) rose 9% in the quarter year-over-year, and wet soup shipments in the United States rose 12% for Campbell, jumping from weakness last year. A good percentage of this increase was my doing. Campbell's "Select" soup is excellent. It's better than Progesso, in my opinion, and far better than condensed soup. Especially good are the "Select" Vegetable Fiesta, Tomato Garden, and Clam Chowder soups. You can't beat a $2 meal. (Well, Brian can -- but a pickup truck, a shovel, and a busy road alongside some woods are necessary.)

Coupled with the ongoing battle to grow condensed soup volume is the evolving story of improved operating results due to continued cost cutting, completed restructuring, and better inventory management. Although last year's results were skewed by inventory changes and other issues, Campbell's jump in cash flow from operations of over 100% this quarter, to $465 million, is encouraging. The company was able to decrease its cost of goods sold about 1%, or $12 million, to $848 million, while increasing sales 4.5% to $1.9 billion. So, the decline in "cost of goods sold" was of course much more substantial than the 1% shown. Campbell also lowered administrative expenses by $10 million, or 1.6%.

Profitability ratios improved across the board at the Soup King, from gross to operating to net margins, for both the quarter just ended and the past six months. Take a look:

        2nd Quarter Ended   2nd Quarter Ended
         January 30, 2000    January 31, 1999
Gross          55.7%                53.2%
Operating      24.6%                20.2%
Net Profit     14.6%                11.9%

         Six Months Ended    Six Months Ended
         January 30, 2000    January 31, 1999
Gross          55.0%                53.6%
Operating      23.9%                22.4%
Net Profit     14.0%                13.2%

Campbell increased its diluted earnings per share 33% in the quarter thanks in part to cost savings, while it decreased its shares outstanding 4% from last year after buying back $128 million in stock the last three months. Notable is the 6% rise in soup and sauce sales for the past three months (year-over-year) coupled with a big 40% increase in earnings for this division. There's some voodoo going on there regarding last year's numbers, but even without that, the cost savings, new inventory practices, and good price mix (with wet soup doing well) is shining through.

For the past six months, the company grew earnings 11.2% while it decreased its diluted share count 4.2% year-over-year. So, pure earnings growth was closer to 7%. Eleven percent is pretty good, but it is less impressive given the amount of shares that the company needed to buy back to obtain this growth. Plus, management is actually aiming for closer to 13% earnings growth. They are essentially committed to buying back about 2% of the company's shares annually in the process.

When the company's quarterly SEC document is released, we'll look at the balance sheet. There are questions on our Campbell Soup message board about the company's debt and shareholder equity. Judging from the previous quarter alone (what we have to go on), the debt is mainly from the restructuring and the equity level is not a surprise. Shareholder equity took a plunge following divestitures, thereby raising the debt-to-equity ratio considerably higher. Not lovely, but not surprising. It will also be interesting to see where inventory levels are on the balance sheet.

As I wrote on the Campbell message board, the Drip Port stopped buying Campbell in 1998 mainly because of the high fees instituted in its plan. As we stopped buying, the business was underperforming our expectations, too, which only reinforced our non-investing position. The fees in the plan are still high enough that we'd be better served buying Campbell through a service like ShareBuilder or BuyandHold, but we're still not compelled to buy the shares either way, even though we may end up missing out on something. (We're still studying it and weighing several options, so the case ain't closed.)

Campbell's stock is near a three-year low (which doesn't necessarily mean anything) and it is yielding a healthy 3%. The stock trades at about 15 times year 2000 estimates while earnings per share were recently expected to grow 18% this year and 9% next. If you've continued to dollar cost average into the stock over the past few years, it makes little sense to stop now while the share price is lower and the dividend yield higher. After all, the business looks better than it did 18 months ago.

The final reminder for today -- and it's what you'd expect from the Fool -- is that you must decide what is right for you. You must do what you feel most comfortable doing when it comes to investing your money.

Visit the message boards linked below to discuss this column and Dripping. And have a Foolish, warm weekend. Mmmmm, mmmmm, Fool on.

Drip Portfolio

  Ticker Company Price
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  PEP PEPSICO, INC. (0.1) (0.23%) 43.37 
  JNJ JOHNSON & JOHNSON (0.15) (0.27%) 55.35 
  INTC INTEL CORPORATION (0.16) (0.81%) 19.66 
  PAYX PAYCHEX INC (0.59) (1.92%) 30.15 
  Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
 10/07/98 50.5452 MEL 34.29 26.53  -21.95%
 07/28/00 15.2182 PEP 45.57 43.37  -2.73%
 11/14/97 39.403 JNJ 42.32 55.35  31.97%
 09/08/97 59.9456 INTC 25.10 19.66  -20.88%
 02/05/02 10.275 PAYX 34.06 30.15  -11.49%
  Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
 10/07/98 50.5452 MEL 1,733.06 1,340.96  -392.09 
 07/28/00 15.2182 PEP 693.53 660.00  -33.54 
 11/14/97 39.403 JNJ 1,667.59 2,180.94  513.36 
 09/08/97 59.9456 INTC 1,504.68 1,178.56  -326.12 
 02/05/02 10.275 PAYX 350.02 309.79  -40.23 

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Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.