Campbell Soup: Mmm, Not So Good

For much of the past five years, investors have consistently said mmm, mmm, good to shares of Campbell Soup (NYSE: CPB). But the company lost some of its flavor in the first quarter and isn't showing signs of getting it back anytime soon.

Sales growth of 7% for the second quarter continued recent trends. Unit volume and mix contributed 3% of the sales bump, with pricing and currency gains accounting for the rest. The domestic soup, sauces, and beverages segment grew 6%, while the international segment of that business line reported a 13% gain. During the quarter, Campbell completed its sale of the Godiva chocolate business, so previous-year results are now included in discontinued operations.

Campbell's problems are on the cost side, with gross margins, a key driver of adjusted earnings per share, sliding 110 basis points to 40.1%. That margin compression led to earnings growth trailing that of sales, leaving adjusted earnings per share to rise only a penny to $0.69, slightly below analyst consensus estimates.

The company said it's facing "unprecedented commodity and energy cost increases" but is taking steps to restore margins through a combination of price increases and productivity improvements. While it's clear that cost increases have put a damper on some food companies, producers like Hormel (NYSE: HRL), General Mills (NYSE: GIS), and H.J. Heinz (NYSE: HNZ) have found ways to deliver satisfying results.

I know that consumer goods manufacturers face different cost pressures, but it's hard not to think that Campbell has been a little slow on the uptake. After all, grain prices have been rising since last summer, and all manufacturers are facing the same transportation cost issues.

The company is sticking with its full-year guidance of earnings per share to increase 5% to 7%. But given the fiscal year's slow start, this Fool thinks Campbell will have to find some major "mmm" in the second half to achieve this.

For related Foolishness:

• While Campbell's earnings have been cooling down,
• And Dean Foods tasted some sour milk,
• Heinz has been saucing it up.