Campbell Soup Swings to Loss on Product Recalls

Bolthouse Farms business suffers production issues and exit of top brass

c1Convenience foods maker Campbell Soup Company (NYSE: CPB) (“Campbell”) announced its Q4 FY16 and full year FY16 financial results on September 1st, 2016.

The Camden, New Jersey-based Company, together with its subsidiaries, manufactures and markets convenience food products. It operates through three segments: Americas Simple Meals and Beverages, Global Biscuits and Snacks, and Campbell Fresh. Led by its iconic Campbell’s brand, the Company’s portfolio includes Pepperidge Farm, Bolthouse Farms, Arnott’s, V8, Swanson, Pace, Prego, Plum, Royal Dansk, Kjeldsens, and Garden Fresh Gourmet.

The company sells its products through retail food chains, mass discounters, mass merchandisers, convenience stores, and other retail, commercial, and non-commercial establishments. Read more about Campbell’s financial results below.

Q4 FY16 financial highlights

Source: Company's Presentation
Source: Company’s Presentation

During Q4 FY16, Campbell’s overall net sales slipped 0.4% to $1.69 billion, as revenue from its Americas Simple Meals and Beverages segment was flat and the Global Biscuits and Snacks segment grew marginally. More importantly, the sluggish sales were mainly due to disappointing results at its Campbell Fresh segment, which includes brands such as Garden Fresh Gourmet and Bolthouse Farms. This segment, which accounts for about 13% of Campbell’s annual sales, reported organic sales decline of 12% Y-o-Y, while earnings nosedived 62%.

c3On June 22nd, 2016, Campbell recalled 3.8 million bottles of Bolthouse Farms protein drinks due to spoilage after receiving complaints including reports of illness. Additionally, Campbell’s dealt with supply issues for the drinks as it worked to improve production processes. Campbell also faced consumer backlash for smaller size of carrots harvested too early at its Bolthouse Farms operations. As a result, the company axed several senior managers in the division and is reorganizing it. Campbell continues to struggle with the Bolthouse Farms business that it acquired for $1.55 billion in a major push into fresh foods four years ago.

Campbell’s gross margin decreased from 33.2% to 32.4% during the reporting quarter due to higher promotional spending, inflation, the impact of the Bolthouse Farms recall and related production outages, as well as higher carrot costs, partly offset by productivity improvements.

Source: Company's Presentation
Source: Company’s Presentation

During Q4 FY16, Campbell’s marketing and selling expenses grew 14% to $216 million. Excluding items impacting comparability, adjusted marketing and selling expenses jumped 14% to $196 million, due to higher advertising and consumer promotion expenses. Administrative expenses fell 4% to $185 million, while adjusted administrative expenses fell 19% to $128 million due to lower incentive compensation costs and benefits from cost savings initiatives.

In all, Campbell swung to losses of $81 million, or $0.26 cents per share, compared to a year-earlier profits of $17 million, or $0.05 a share. Excluding certain one-time items, earnings from continuing operations fell to $0.46 a share from $0.49 a share in the year-ago quarter.

Full year FY16 financial highlights

During FY16, Campbell’s sales decreased 1% to $7.96 billion, due to the adverse impact of currency translation and a decline in organic sales, partly offset by benefits from the acquisition of Garden Fresh Gourmet. Organic sales slipped 1% due to lower volume, partly offset by higher selling prices.

Campbell’s EBIT plunged 9% to $960 million during the year. Excluding items impacting comparability, adjusted EBIT grew 11% to $1.46 billion, reflecting a higher adjusted gross margin percentage and the benefits from cost savings initiatives, partly offset by the adverse impact of currency translation, higher incentive compensation costs, and volume declines.

The Company’s cash flow from operations increased to $1.46 billion in FY16, from $1.18 billion a year ago primarily due to higher cash earnings and lower working capital requirements.

Segmental highlights

Americas Simple Meals and Beverages: This segment’s Q4 FY16 sales were $842 million, driven by gains in Prego pasta sauces and Plum products, partly offset by declines in V8 beverages and soup. U.S. soup sales fell 2%, driven by declines in ready-to-serve soups, partly offset by increases in broth. The segment’s operating earnings grew 4% to $191 million, driven by a higher gross margin percentage, partly offset by increased marketing and selling expenses.c5

Global Biscuits and Snacks: This segment’s Q4 FY16 sales inched up 1% to $622 million. Excluding the negative impact of currency translation, the segment’s sales grew 2% driven by gains in Pepperidge Farm Goldfish crackers and Arnott’s biscuits. The segment’s operating earnings rose 5% to $81 million as lower administrative expenses were offset by a lower gross margin percentage.c6

Campbell Fresh: This segment’s Q4 FY16 sales grew 5% to $223 million. Excluding the impact from the acquisition of Garden Fresh Gourmet, the segment’s sales fell 12%, reflecting lower sales in carrots and carrot ingredients, as well as Bolthouse Farms premium refrigerated beverages, partly offset by gains in fresh soup and Bolthouse Farms salad dressings. This segment’s operating earnings nosedived 62% to $8 million, mainly due to the adverse impact of the voluntary recall on Bolthouse Farms Protein PLUS drinks and related production outages, as well as higher carrot costs and lower sales in carrots and carrot ingredients. The decrease was partly offset by lower administrative expenses.c7

Other highlights

Dividends: Campbell raised its quarterly dividend by 12% from $0.31 per share to $0.35 per share. The quarterly dividend is payable on October 31st, 2016, to shareholders of record at the close of business on October 12th, 2016.

c8Guidance for full year FY16

For FY17, Campbell expects adjusted EPS to increase between 2% and 5% to $3.00 to $3.09 a share, adjusted EBIT to increase by 1% to 4%, and sales to be flat or up 1%, assuming the impact from currency translation to be nominal.

Stock Performance

c9Campbell’s stock ended the day at $55.99, gaining 1.89%, at the close on Monday, September 12th, 2016, having vacillated between an intraday high of $56.05 and a low of $54.54 during the session. The stock’s trading volume was at 2,438,514 for the day. The Company’s market cap was at $17.66 billion as of Monday’s close.

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