Temperatures were unseasonably warm. It's the excuse that never fails for retailers, and its apparently worked out so well that food-processor Campbell Soup (NYSE: CPB ) has adopted the justification to defend its slower-than-expected quarter. OK, I'll admit the thought of hot soup on a warm and sunny autumn day doesn't sit well for me. But that just means the company is counting on one blustery, bitterly cold winter to reheat its recent earnings cooldown.
Results weren't all that bad
To be fair, Campbell's first-quarter results weren't as bad as the Street made them out to be. Total sales grew 6.7%, compared to the 5%-6% annual growth the company has posted over the past two years. While U.S. soup sales were down 1%, beverages (think V8), baking (think Pepperidge Farm), and everything outside the United States grew sales at double-digit rates.
Gross margins slipped because of cost inflation and higher promotional spending. Operating income, at 18.8% of sales, was 150 basis points lower than last year, affected by higher advertising costs and higher selling expenses, primarily from Godiva. Unfortunately, price increases were not high enough to offset rising costs. At $0.70, EPS from continuing operations were 6% percent higher than last year, but a penny lower than Street expectations.
Playing the weather card
If anyone understands the effect of weather on soup sales, it's Campbell. The company explained that a warm spell can affect soup sales for a quarter, but they will be offset by cold snaps over the course of a year. Based on this superior insight into soup-slurping trends, management stated that it expect U.S. soup consumption to get back on track over the next few months, and affirmed its previously announced EPS growth guidance of 5% to 7% for the year.
Is this soup just what the doctor ordered?
While a hot broth is highly recommended when you feel under the weather, I'm not terribly excited about Campbell. Earnings growth has been in the low teens the past few years, causing the stock to have a nice run. And I'll admit a 2.5% dividend rate is tasty.
But management's outlook for the near term is mid-single-digit sales and earnings growth -- which doesn't justify a P/E of 16 times trailing-12-month earnings, in my book. Foolish investors seeking a defensive stock with better growth potential need look no further than Procter & Gamble (NYSE: PG ) , Colgate-Palmolive (NYSE: CL ) , Unilever (NYSE: UL ) , or PepsiCo (NYSE: PEP ) . When it comes to consumer products companies, the best brands win out in the end.