Campbell Soup Company (NYSE:CPB) reported first quarter results in February, turning in a net sales decrease of 1% to $2.2 billion with reported earnings per share up 20% to $0.85. This dynamic of falling sales and rising earnings resulted from gross margin expansion on the back of productivity gains, price realization, supply chain improvements, and cost cutting measures.
This brings up a key question for long-term investors keen on the predictability of Campbell's business model: Given that the company is a slow growing cash cow with 147 years of operating history, a market cap of $19.4 billion, a 60% share of the global soup market, and a 10-year average annual revenue growth of 1.3%, what tools can the soup and snack behemoth use to grow revenues and earnings?
Here are three such levers.
As shares outstanding decrease, the remaining investors stand to benefit if earnings hold steady or grow. Since 2006, Campbell has repurchased approximately 100 million shares, reducing its total share count from 414 million to 313 million. Given 2015 net income of $691 million, if shares outstanding had been at their 2006 levels, shareholders would have realized just $1.67 in earnings per share as opposed to the $2.21 actually reported, a 32% difference.
In 2011, the Board of Directors authorized a $1 billion share repurchase program with no expiration date. Of this authorization, approximately $525 million remains unused as of Nov. 1, 2015. Although the company repurchased $32 million of shares in the fiscal 2016 first quarter, management made no mention of the amount of planned total share repurchases for 2016 during the earnings call.
In theory, share buybacks cannot go on forever -- at the previous decade's repurchase rate, Campbell would have zero shares outstanding by 2046 -- so where else will growth come from?
Collective growth through acquisition
In June of 2015, Campbell announced the acquisition of Garden Fresh Gourmet, the maker of tortilla chips, hummus, dips and the "No. 1 branded refrigerated salsa in the U.S." In 2014, before the acquisition, Garden Fresh delivered $100 million in net sales, which should represent approximately 10% of Campbell's $1 billion Campbell Fresh division. Overall, Campbell realized total net sales of just over $8 billion in 2015, so Garden Fresh Gourmet's 2014 sales represent just over 1% of the top line. This is not enough to make a sizable contribution to growth, but it does underline management's push into a higher growth category: packaged fresh foods, a $19 billion segment that grew 4.9% in 2014.
It also represents a cumulative growth strategy that adds to the company's previous acquisitions: Bolthouse Farms in 2012, organic baby food company Plum in 2013, and biscuit company Kelsen in 2013. These companies generated sales of $689 million, $93 million, and $180 million, respectively, prior to their acquisition. While none of the buyouts individually generate double-digit earnings growth, they are much more powerful as a collective portfolio.
As indicated in the earnings call, the 20% increase in first quarter earnings was due in part to Campbell's cost cutting program that is expected to reach $300 million by 2018. From 2014 to 2015, the company reduced research and development costs from $121 million to $113 million, a 6.6% decrease. Ironically though, the implementation of the plan itself carried with it a $22 million cost.
This cost savings also helped to facilitate a 7% decrease in 2015 marketing and selling expenses, as indicated by management in the company's 2015 annual report. The actions taken under the plan resulted in restructuring charges of severance pay and benefits in the amount of $115 million. Specifically, this included the commencement of a voluntary separation program in 2015 that led to the resignation of 471 employees along with the elimination of an additional 230 positions.
Management furthermore reorganized its businesses under the categories of Americas Simple Meals and Beverages, Global Biscuits and Snacks, and Campbell Fresh. The company also implemented Integrated Global Services (IGS). These measures were designed to facilitate shared services across the company, which should ultimately lead to reduced costs and efficiency gains.
Campbell previously indicated that cost savings going forward would be a continuation of these measures: restructuring, alignment and shared services, and overall increased efficiencies. With the recent success, management increased its 2018 target savings from $200 million to $300 million.
Ultimately, one can argue that if a conservative $200 million of this cost reduction actually reaches the bottom line, then using net earnings of $691 million last year, shareholders could realize the net benefit of a 29% increase to the bottom line.
Bringing growth to a simmer
For buy and hold investors, Campbell Soup Company has a sturdy economic moat built on its iconic brands and products. The company has delivered years of solid performance paired with sturdy fundamentals, resulting in high degrees of predictability for the long-term investor. It is safe to say that consumers will still be slurping up chicken noodle soup 10 years from now, even if the bowl was made with a 3D printer.
Given Campbell's size and market share, the question then becomes, where will growth come from? The maker of Spaghetti O's has at its disposal three key levers to drive growth: share buybacks, cumulative acquisitions, and effective cost control. Not mentioned here are also the benefits of price inflation and global population growth that will aide the soup and snack maker going forward ... mmm mmm good!