Input Cost Inflation a Worry for Campbell (CPB) Q4 Earnings

Campbell Soup CompanyCPB is scheduled to release fourth-quarter fiscal 2018 results on Aug 30. This provider of branded convenience food products delivered back-to-back positive earnings surprises in the past two quarters.

Campbell Soup Company Price and EPS Surprise

Campbell Soup Company Price and EPS Surprise | Campbell Soup Company Quote

However, like many other food companies, Campbell is also battling input cost inflation, which has been hurting its margins for a while now. That said, let's see if the company can retain its solid earnings record this time around.

Input Cost Inflation & C-Fresh Softness

Campbell has been witnessing strained margins off late. In third-quarter fiscal 2018, adjusted gross margin contracted 390 basis points, mainly due to cost inflation, escalated supply-chain expenses (particularly in C-Fresh) and promotional spending (especially in Americas Simple Meals and Beverages) along with dilutive effect from recent buyouts. The cost inflation stemmed from increased prices of dairy, steel cans, meat and aluminum along with greater-than-expected rise in transportation and logistics expenses. Apart from Campbell, companies like Pinnacle Foods PF , Conagra Brands CAG and General Mills GIS among others are also bearing the brunt of input cost inflation.

Coming back to Campbell, gross margin softness, and higher adjusted marketing and selling expenses weighed on its EBIT margin in the third quarter. Moreover, management lowered its gross margin outlook for fiscal 2018, wherein the company now expects cost inflation of about 4%, due to sudden rise in transport and logistic costs. This along with weakness in C-Fresh and high promotional expenditure compelled management to lower its earnings outlook for fiscal 2018. Also, Snyder's-Lance's buyout is likely to impact results. Talking of C-Fresh, results of this segment came way below management's expectations in the third quarter. Though organic sales rose 1%, the segment posted an operating loss of $19 million against earnings of $1 million recorded in the year-ago period. This was accountable to dismal gross margin, which, in turn, was a result of lower manufacturing efficiencies and carrot crop yields along with inflated transportation and logistics expenses. The Zacks Consensus Estimate for C-Fresh sales for the fourth quarter stands at $225 million, which is in line with the year-ago period sales.

The aforementioned hurdles are likely to persist in fiscal 2018, which keeps us apprehensive regarding the upcoming earnings performance. Incidentally, the consensus mark for fourth-quarter earnings stands at 25 cents, which shows a substantial decline from 52 cents recorded in the year-ago period.

Focus on Snacks Business & Buyouts to Aid

Focus on strengthening the presence of its growing snacks brands is part of Campbell's core strategies. Campbell remains committed to shifting its overall portfolio toward the fast-growing snacking category, which is expected to form about half of Campbell's proforma sales in future. Markedly, Campbell acquired Snyder's-Lance in the third quarter, which will help it create a distinguished snacking business and enhance the performance of the global biscuits and snacks portfolio. Such constant efforts to expand the snacking category also helped Campbell's global biscuits and snacks business grow consistently on both top and bottom-line fronts. Evidently, sales at this division surged 35% to $862 million in the third quarter. For the quarter under review, consensus mark for sales at this segment is pegged at $1,190 million compared with $624 million reported in the same period last year.

Apart from Snyder's-Lance, Campbell made many other strategic acquisitions including Pacific Foods, Bolthouse Farms and Kelsen among others, which have strengthened its portfolio. These factors along with Campbell's efforts toward product innovation and brand building are likely to fuel the top line. The Zacks Consensus Estimate for sales is pegged at $2,243 million, up 34.8% from the year-ago reported figure.

Also, Campbell is progressing well with its cost-savings plan, which was announced in fiscal 2015. The company's strategy of concentrating on supply-chain efficiencies along with curtailing costs and reinvesting part of these savings in areas with high growth potential is likely to drive growth. Gaining from the solid progress on this front, the company generated savings of $25 million in third-quarter fiscal 2018, bringing the program-to-date savings to $390 million. The company expects this program to deliver $75-$85 million of savings in fiscal 2018, which is incremental to the productivity gains from ongoing supply-chain initiatives. Though Campbell's cost-saving initiatives and efforts to augment sales bode well, input cost inflation and softness in C-Fresh segment are likely to remain major hurdles and drag the bottom line.

What Does the Zacks Model Unveil?

Our proven model doesn't show that Campbell is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Though Campbell carries a Zacks Rank #3, its Earnings ESP of -1.66% makes surprise prediction difficult. You can see the complete list of today's Zacks #1 Rank stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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