Campbell Stock: Keeping faith after second quarter earnings (NYSE: CPB)
A tough quarter For Campbellbut stable orientation
Campbell’s (CPB) investors can’t say they weren’t warned. Management made it clear in its review of the first quarter of FY22 results that the second quarter could look a little lackluster due to labor and material constraints. Which makes me wonder a little why investors sent stocks falling so sharply ahead of the company’s recent earnings call. Granted, the company missed expectations, but that wasn’t necessarily the biggest “puff” either. Nonetheless, with the aforementioned concerns coupled with higher-than-expected inflation and ongoing pandemic-related challenges, we have the following results for the second quarter ending January 30, 2022:
- (2) % decrease in organic net sales quarter on quarter. Organic net sales fell to $2,207 million from $2,256 million in the prior year period.
- The Meals & Beverages (“M&B”) and Snacks segments both saw lower organic net sales QoQ. Organic sales of M&B and Snacks fell to $1,273m and $934m respectively from $1,295m and $961m in the prior period.
- Adjusted gross margin down (340) bps QoQ. Adjusted gross margin fell to 30.4% QoQ. For reference, adjusted gross margin also declined quarter-on-quarter in the first quarter of FY22 to 32.5%, reflecting a loss of (200) basis points.
- Adjusted EBIT of $318m down (17)% from the prior quarter. Adjusted EBIT was $382 million in the prior period.
- Adjusted EPS of $0.69 down (16)% QoQ. Adjusted EPS was $0.82 in the prior period.
However, management “sticks to its guns”. They reaffirmed their forecast for the full year, betting on a recovery in the second half.
Figure 1: Campbell’s orientations for exercise 22
Source: Campbell’s First Quarter FY22 2022 Results Presentation
Should long investors also “stick to their guns”, or is it time to think about heading for the exit?
Keeping the faith on CPB
When I last wrote about the CPB, I suggested that long investors might consider playing the stock, not so much because they might expect to hit a “home run”, but because a position could work as a bond proxy through which one receives a healthy dividend against stocks that can hold up reasonably well through tough times as well as good times. I further argued that management’s current strategy of simplifying the business may prove more “sustainable” in the long term compared to a more ambitious and riskier strategy like that of Mondelez (MDLZ) where the company is tackling many other categories in multiple geographies around the world. .
Time will tell if my thesis proves to be correct. But, in the meantime, I am more interested in understanding how CPB intends to put the company back “on the right track”. On this point, the management highlighted 4 underlying causes of the recent drop in performance:
- Labor and material constraints.
- Significant inflation, namely inflation of raw material and logistics costs.
- Omicron Surge.
- Difficult compounds.
Of course, these are not isolated causes but rather interrelated. Thus, any improvement in one area would likely be associated with improvements elsewhere. Management offers investors a set of optimistic resolutions for the second half of the year (the quotes below are taken from the transcript of the company’s second quarter FY22 earnings call):
- While overall volume in the second quarter was impacted (negatively) by labor and material constraints, CPB expects a recovery in supply in the second half, complemented by an improvement in the supply situation. labor.
- CPB management “…certainly does not expect inflation to come down” and therefore variability will continue in commodity and logistics costs. However, heading into the third quarter, the company is “…pretty well hedged [in terms of costs with roughly]…90% [coverage] on raw materials. In addition, CPB predicts that the “…second wave of pricing [actions]” and continued spending reduction efforts will help offset ongoing inflationary impacts.
- Prior to the second quarter, management had “…anticipated a recovery trajectory that was [expected to begin] through the second quarter in the back half. But, the start of the recovery has been delayed due to the sudden appearance of the Omicron variant in December 2021 and January 2022. Still, CPB notes that “…[the] good news… is that, even if [the Omicron variant] came fast and furious in the trimester, it also calmed down much faster than [the company had] seen [with] before [variants]. And so it allowed [the company] to get back on track. »
- Recall that CPB benefited from the pandemic-related tailwinds, with everyone stuck at home, which generated strong results in the first quarter of FY21 and the second quarter of FY21. As a result , results for the third quarter of FY21 and the fourth quarter of FY21 were significantly weaker as the early effects of the pandemic began to wane. As a result, CPB’s Q3 FY ’22 and Q4 FY ’22 comps will be much more forgiving, supporting a second-half recovery. In addition, continued product demand and additional capacity in the second half, particularly in snacks, should strengthen sales.
Personally, I think management made a reasonably strong case for the rest of the year. At the same time, I recognize a few areas of concern. On the one hand, the Snacks segment, which is supposed to be CPB’s growth engine, actually performed worse (in percentage terms) during the second quarter than the M&B segment. Of course, this is only a single data point and shouldn’t be extrapolated too much. But it is certainly not an encouraging performance. As a second area of concern, management touted its pandemic-related gains to consumers who flocked to Campbell’s products when many families chose (or were forced to choose) home-cooked meals. With consumers being the unstable creatures that they are, it is not clear that these gains will last. Finally, it is understood that private labels can gain a significant share of established brands during periods of high inflation. With around 30% of CPB’s revenue coming from Walmart (WMT) and Kroger (KR), there is always the risk that their share with these customers will erode as inflation persists.
Going back to my question of whether long investors should stick with the stock, I’m not sure the answer is that clear cut. From my perspective, management has provided a compelling argument that the remainder of fiscal 2022 should be much stronger than the first half, which will likely lead to an improvement in the share price. On the other hand, recent performance may call into question CPB’s ability to follow its long-term growth algorithm.
Figure 2: Campbell’s long-term growth algorithm
Source: Campbell’s Investor Day presentation for fiscal year 2022
Graphic source: Yves Sukhu
Personally, I intend to maintain my long position. As implied earlier, I am not in CPB to get rich. I use stock as a vehicle where I can park money assuming my capital will be protected for the long term (the key word is “long term”), ideally with some appreciation, although probably disappointing – for that I collect the (current) 3%+ dividend yield. Based on this, it’s a better idea than just keeping cash in the bank.