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Campbell's Is One for the Long Run

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Campbell Soup's (NYSE: CPB  ) second-quarter profits dropped 14% to $205 million as higher input costs and substantial promotional spending took their toll. Despite the fall, results came in ahead of Street expectations, and Campbell's maintained its outlook for the year, hoping to earn somewhere between $2.35 and $2.42 per share.

Curbed spending
Food makers have struggled to find a balance between rising commodity costs and low consumer spending. The specific problem in this quarter, according to Campbell's, has been that the holiday season splurging has made consumers tighten their purse strings further. This led to declining sales volumes for not just Campbell's, but also peers such as H.J. Heinz (NYSE: HNZ  ) , which saw sales in its North America consumer products segment fall 1.1% as higher prices affected sales volumes.

In order to maintain profits, Campbell's has been trying to sell its products at full price rather than at a discount. The lower volumes on account of "no discounts" were partially offset by higher prices and Campbell's revenues for the quarter remained more or less unchanged from the year-ago period.

Finally Campbell's sells soup
The biggest win for me this quarter was that Campbell's managed to report the fourth straight quarter of rising profits from its U.S. soup business. For those who don't know, before CEO Denise Morrison took over the reins of the company last year, Campbell's namesake soup business was flailing. Since then, the company's efforts to cut down on discounts, boost innovation, and focus brand-building have given it the potential for a bright future. This year, Campbell's has launched 27 new products as opposed to only three last year, hoping to stimulate consumers' palates and revenue.

Change of tactics
Broadly, Campbell's is banking on three strategies to take the company forward:

  • Growing its North America soup and simple meals business profitably through innovations and brand promotions, which have already benefited the segment, as mentioned earlier.
  • Building upon its international presence. Campbell's is aggressively expanding in the emerging Chinese market. The company wants to take its good overseas numbers forward. In the last fiscal year, it earned close to half of its top line from overseas sales.  
  • Boosting growth of its healthy beverages and baked snack business

Campbell's plans revolve around one simple mantra -- brand expansion. Its new strategic framework to boost top line may weigh on the company's bottom line in the coming quarters, but should enable future success. Campbell's is in a transformative state at present, but I believe it is on the right track-- the turnaround of its soup sales is a big testament. This stock is one for the long run as its strategies should help deliver profitable growth in future.  

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Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of H.J. Heinz. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Related Tickers

10/24/2016 4:02 PM
CPB $53.13 Down -0.18 -0.34%
Campbell Soup CAPS Rating: ***
HNZ.DL $72.49 Down +0.00 +0.00%
H.J. Heinz Company CAPS Rating: ****