The global baked food industry is expected to be worth in excess of $310 billion by the end of 2015. In addition, the market for soups, sauces, and dressings is estimated to grow at a rate of 2.1% per year to reach $331 billion by 2015. Hectic lifestyles that leave less time to cook meals the conventional way drive demand for baked goods, soups, and sauces. This is why Campbell Soup (CPB 1.93%) should ideally perform well, but this hasn't been the case so far.
Campbell failed to capitalize on the growth trends above and started its fiscal 2014 on a very bad note. Its first-quarter results reminded me of Murphy's Law -- anything that can go wrong, will go wrong – and it's no surprise that the CEO had to start the earnings call with "I'm disappointed with our first quarter results."
Getting it wrong
Campbell's organic sales declined 4%, which led to an overall sales decline of 2% from the same quarter last year. Adjusted earnings from continuing operations declined a sharp 21% versus the year-ago quarter to $0.66 per share.
The negative impact of movement in retailer inventory levels due to a late Thanksgiving holiday was one of the main reasons behind such lackluster results. In addition, other factors such as weakness in the core business, the voluntary recall of a range of Plum Organics pouch products, and marketing investments to support new products and build the Bolthouse Farms brand compounded the problems.
Going forward, Campbell considers its three acquisitions -- Bolthouse Farms, Plum Organics, and Kelsen – new growth drivers with combined sales of more than $1 billion. In addition, Campbell has also focused on cost reductions. Initiatives undertaken in the first quarter are expected to deliver annualized cost savings of approximately $40 million.
There were positive takeaways from the first quarter. The global baking and snacking segment's sales increased 6% to $609 million, primarily due to the Kelsen Group acquisition. However, this wasn't enough to offset the negativity that arose from other segments.
Campbell lowered its guidance for fiscal 2014 and this spooked investors. This reduced guidance indicates that Campbell still lacks confidence about its turnaround plans. In addition, share buybacks remain suspended in order to reduce the debt incurred to finance the Bolthouse acquisition. Considering these factors, it is no surprise that Campbell has dropped 15% in the last six months and it might continue to suffer until and unless it executes its strategies in a better way.
General Mills and Flowers Foods are doing much better
General Mills (GIS 2.88%) and Flowers Foods (FLO 1.52%) haven't been struggling due to retailer inventory issues, probably because their inventory management has been better.
General Mills started fiscal 2014 on a strong note. In the first quarter, General Mills reported an 8% increase in revenue from last year to $4.37 billion. It also reported 6% year-over-year growth in earnings to $0.70 per share, in line with expectations.
General Mills has also found success in international markets. On the back of international acquisitions, the company experienced a 27% year-over-year increase in international sales to $1 billion in the first quarter of 2014. General Mills is enjoying growth from different quarters while Campbell is finding such growth hard to come by.
Flowers Foods also reported robust results for the third quarter. It achieved a 22.5% increase in sales and a 6% increase in earnings per share from the year ago period, primarily driven by acquisitions.
Flowers Foods thrives on acquisitions. In the third quarter, Flowers Foods acquired a bakery in Modesto, California. Earlier this year, it acquired the facilities and brands of Hostess in a deal worth $355 million. Flowers Foods' U.S. market share now stands at 14% and market share in its core markets of the Southeast and Southwest has risen to 30% as a result of acquisitions. More importantly, despite growing via acquisitions, Flowers Foods' total debt-to-equity ratio of 92 is much lower than Campbell's 329.4.
Bottom line
Campbell isn't executing well even though it operates in a growing market. In comparison, its peers have performed quite well. Also, at a trailing P/E of 32, Campbell is quite expensive compared to General Mills and Flowers Foods which both trade at around 20 times earnings. Hence, considering Campbell's rich valuation and its weak performance, it is a stock to stay away from.
