Campbell's Quandary
Or is slow change to be expected?

by Jeff Fischer (TMFJeff)

PARIS, FRANCE (June 29, 1999) -- A multi-billion-dollar business is a large ship to turn. It takes time.

Last Friday, Campbell Soup (NYSE: CPB) announced that its current quarter will fall short in the earnings per share (EPS) department by eight to ten cents per share, meaning that about $0.28 in fourth quarter EPS is likely. This compares to an estimate of $0.38.

The news is revealing, but not surprising. Having started several months ago, Campbell continues to reconfigure its inventory relationship with thousands of retailers. This process takes time.

3Com (Nasdaq: COMS) and Iomega (NYSE: IOM) are high-tech companies with products that are hoped to move quickly. However, these companies required at least two quarters to reconfigure and streamline their inventory models, and these companies don't sell canned soup that can sit on a shelf for two years and still be happily consumed. (I bought a can of chicken noodle soup in college in 1992 and Brian just ate it yesterday.)

The good news: despite selling products with extensive shelf-lives, the inventory issue at Campbell Soup is not nearly as nefarious as it might appear. In fact, the company is in the driver's seat and is taking short-term hits now to achieve long-term gain.

In the past, Campbell offered retailers a sharp discount on its soup once per quarter, at which time grocery stores would smartly load up, buying mountains of soup to stash in giant warehouses. Campbell is ending this quarterly discount in order to earn more money. It wants retailers to buy the soup at regular prices. In the process of charging more, Campbell will streamline its inventory practice, too, knocking out about four weeks worth of inventory from the channel. Because Campbell will no longer offer a discounted price each quarter, retailers are now working through warehouses full of old Campbell soup before buying more.

Picture the end of the Raiders of the Lost Ark. Remember all of those wooden crates that filled the giant warehouse? Now imagine that all of the crates contain Campbell Soup. (Now imagine that bad guy with the melting face near the end of the movie, when the Ark was opened. Gruesome, wasn't it?) This is the situation: old, cheaply bought crates of soup will be sold before more soup is bought.

As a result of the backlogged inventory, Campbell expects shipments to fall about 10% this quarter. Retailers now hold four to six weeks worth of soup in inventory. Campbell wants to cut this in half and perhaps it will later fall to just one or two weeks as grocery store chains strive to reduce storage costs. As you might know from studying businesses such as Dell Computer (NYSE: DELL) and Amazon.com (Nasdaq: AMZN), the less time that inventory is held, the better, and the more inventory turns a company achieves, the better for cash management.

Campbell said it hopes to save up to $100 million annually via its new inventory program and by charging grocers regular prices rather than offering a quarterly discount. It'd be interesting to know how much of quarterly soup sales were previously made at a discount price, but the information isn't disclosed and I haven't been able to obtain it over the phone with Campbell Soup. We might guess that up to six weeks worth of soup was bought at the discount every quarter.

Anyway, Campbell is already in position to achieve savings of over $200 million from recent divestitures and cost-cutting programs. Add another $100 million in savings to the pot annually, and we're talking good savings -- great for margins -- for a company with under $7 billion in annual sales.

So, inventory reductions are a near-term pain, but a large long-term gain. In fact, Campbell did not change its year 2000 EPS guidance. It expects the inventory issue to clear by the end of the fiscal year.

Inventory tweaking isn't all that keeps the company busy, however. No, no, no. Just when you thought it was safe... just when it seemed that Campbell's business was reconfigured to the hilt after years of reconfiguring... Campbell is at it again.

Yes, again.

The company announced on Friday that it will combine its U.S. and Canadian soup businesses -- its two largest units -- into one giant, bubbling operation. This should result in further cost savings of up to $25 million per year. To get there, the company will take a $35 million to $45 million one-time charge this quarter as it cuts out sales, administrative, and production costs. Specifics are due from management later.

Once merged, Campbell can focus its entire major unit on growing key condensed soup sales. Volume is already up 3% this year, which is as well as the company has done in many years, but it wants much better. Mister F. Martin Thrasher, the gentleman responsible for boosting sales in Canada as senior VP for Campbell's Canadian and European business, will take over the newly combined North American unit. Unfortunately, Mister Mark Leckie resigned as vice president and president of Campbell's U.S. Grocery unit with the announced reconfiguration. He was seen as an innovative executive. Perhaps visions for the company clashed behind the scenes in boardrooms.

So, where is the Campbell quandary? There really isn't any new one. Management continues to reconfigure its inventory practice and $100 million in annual savings isn't a quandary. It'll be great. Elsewhere, Campbell continues to try every approach in the book (and out of it) to grow annual condensed soup volume more than it has in the past. We're happy that the company continues to try. 3% volume growth isn't bad. Given continued effort, Campbell could find formulas that work further. If not, the costs of trying to grow are being recouped via other cost savings.

In the end, whatever happens, at the very least this company should emerge a leaner, more efficient, steady, cash-flow generating machine. Management should continue to be able to buy back 2% of shares annually (if it wishes), and pay a 2% dividend yield. On top of that, hopefully Campbell will eventually add enough annual EPS growth to the mix to push investors' total return into market-beating territory. It may just need more time.

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