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Financial Analysis of Campbell's Soup Company

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Financial Analysis of Campbell's Soup Company
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Financial Analysis of Campbell's Soup Company - February 18th, 2011

Campbell Soup Company (NYSE: CPB) is the largest producer of soup in the world. It has a 60% market share in the 4 billion dollar soup market. Campbell's has market shares in a number of food industry categories with products such as soups, sauces, snack foods, baking goods and beverages. Campbell's products are sold in over 120 countries around the world.

Campbell's soup relies heavily on its soup sales. Campbell's ability to adapt to new consumer trends, such as healthier eating will be important to Campbell's in order to keep its majority of the soup market share. Campbell's has developed a new low-sodium soup line in order to target health conscious consumers and baby boomers concerned with high blood pressure. Since baby boomers are Campbell's main consumer base, educating the baby boomers about the benefits of their low-sodium soups will be pivotal to Campbell's future success.

Campbell's biggest challenge lies in its continued growth. Campbell is dependent on mature (e.g. slower growing) US market for the majority of its sales. However, it is investing heavily in the emerging markets of Russia and China, which account for over 50% of worldwide soup consumption. The company expects to be profitable in these two countries by 2014, after having invested $50 million annually in these two markets since the mid-2000's.[1]

1 Business Overview
1.1 Quarterly Earnings
1.2 Business Segments
1.2.1 U.S. Soup, Sauces and Beverages (48% sales, 64% income)
1.2.2 Baking & Snacking (26% sales, 22% income)
1.2.3 Int'l Soup, Sauces and Beverages (18.5% sales, 11% income)
1.2.4 North American Foodservice (7.5% sales, 3% income)
1.3 Customers
2 Trends and Forces
2.1 Healthy Living
2.2 Baby Boomers
2.3 Diversification
2.4 Products
2.5 Geographic
2.6 Organic Growth
2.7 Commodities
3 Campbell Soup Company and the Competition
4 References
On June 18, 2010, Campbell's issued a recall of 15 million pounds of SpaghettiOs that are feared to contain undercooked meat. The recall covers three SpaghettiOs products with meatballs that were manufactured at a company plant in Texas with a malfunctioning meat cooker. It is unknown when the cooker began to malfunction so the company has recalled products manufactured since December 2008. The company estimates that the recall covers 35,000 units of SpaghettiOs, however it is expected that the majority of the units recalled have already been purchased and/or consumed.[2]

In late August 2010, rumors began circulating that Campbell's is considering making $2.3 billion bid for Britain's United Biscuits. United Biscuits was bought by private equity firms Blackstone and PAI Partners in 2006. Campbell's is supposedly more interested in the company's biscuit-making operation than its snack operation and may try to buy the former division only.[3]

Business Overview

Founded in 1869 as the "Joseph A. Campbell Preserve Company," Campbell Soup Company is one of the largest food producers in the world, with product sales in over 120 countries.[4] Led by its flagship brands Campbell's, Pace, Prego, Swanson, StockPot, V8,and Pepperidge Farm, the company holds the #1 or #2 position in each of the food product categories or segments in which it operates.[5] In 2008, the company posted revenues of $8 billion, an 8% increase from 2007; net income rose 36.4% to $1.165 billion.[6] Much of the increase in net income is due to Campbell's sale of its Godiva Chocolate Business, which was recorded as an after tax gain of $462 million. Excluding all special items, net income would have fallen to $797 million.[7]

In order to maintain sales growth, Campbell Soup Company is focusing on product expansion in three areas: simple meals, baked snacks and healthy beverages.[4] The company plans to improve its product lines in these areas through the introduction of new healthier and more convenient products, as well as expand these lines into existing and emerging markets.[8] Additionally, Campbell Soup Company plans to continue to make strategic acquisitions to increase its market presence throughout its product lines.

Quarterly Earnings
Q3 2009

In the third quarter of 2009, Campbell Soup Company posted revenues of $2.1 billion, a 4% decrease from Q3 2008 figures; net income fell 15% to $233 million.[9] The decrease in revenue is predominantly due to a negative impact of foreign currency exchange fluctuations and to a lesser extent, a decrease in sales volume. These two factors were mitigated by net pricing increases across all product lines.[10] Net income fell as a result of higher input prices and promotional spending, which were not fully offset by the higher pricing.[11]

Q4 2009

In the fourth quarter of 2009, Campbell Soup Company posted revenues of $1.5 billion, an 11% decrease from Q4 2008 figures; net income fell 22.5% to $69 million.[12] These numbers are not truly reflective of the company's performance, however, as Q4 2008 included 14 weeks as opposed to 2009's 13 weeks. Adjusting for this difference, as well as a 4% adverse shift in currency translation, revenues would have remained constant. The decrease in net income was primarily a result of a $47 million depreciation charge to the company's north European trademarks and goodwill. Again, on an adjusted basis, net income rose 15%.[12]

Q1 2010

In the first quarter of the 2010 fiscal year, Campbell Soup Company generated revenues of $2.2 billion, a decrease of 2% from the previous year; net income increased 17% to $304 million.[13] U.S. Soup, Sauces and Beverages, which generated 48% of the company's total revenues this quarter, decreased 3% compared to last year, which had been an increase of 12% from Q1 2007. Similar trends were seen for all of the brands encompassed within this segment where brands' sales stayed flat or decreased compared to 2008, however all brands experienced tremendous growth from 2007 to 2008.[14] Last year success stems from the launch of several new soup lines in the US and accompanying aggressive marketing; this year the company is not beginning its major ad campaigns until October (later than last year) but they expect total annual sales to remain the same or increase compared to last year.[15]

Q2 2010

In the second quarter of 2010, Campbell Soup Company had revenues of $2.15 billion, an increase of 1% from the previous year; net earnings increased 11% to $259 million.[16] The double-digit growth in earnings was primarily the result of increased productivity gains and favorable currency exchange rates, however it masked many poor performance results. Decreased sales of the Chunky soup line resulted in an 18% decrease in revenue for the ready-to-serve soup segment[17] and U.S. soup sales overall declined by 8%[18] The company attributed this decline to reduced advertising and promotional activity[19], however some have suggested that it may reflect consumer's growing cost-consciousness in choosing cheaper store brands instead of Campbell's.[20] Sales for the Baking and Snacking segment increased by 11%, however 10% of this increase was due to favorable currency exchange rates.[21] Similarly for international sales, which rose 12% this quarter, favorable currency exchange rates accounted for this entire increase, since a price increase canceled the effects of a 2% decline in volume and increased advertising costs.[22]

Q3 2010

In the third quarter of 2010, Campbell Soup Company's revenues were $1.8 billion, an increase of 6.9% from Q3 2009; net income for the quarter decreased 3.4% to $168 million.[23] Excluding favorable currency exchange rates, organic net sales increased 2%. The US soup, sauces, and beverages segment increased revenues by 5%, led by 13% growth for beverages with improved sales of V-8 Fusion. The Baking and Snacking segment grew 1% with increased volumes and promotional spending ultimately offset by a 31% improvement in earnings as a result of lower grain costs.[24] Overall volume for the quarter increased 4% (driven by 5% growth in US soup sales) but the company also increased its promotional spending.[25] International Soup, Sauces, and Beverages sales decreased 2%, primarily due to lower soup sales in Canada, and revenues from the US Foodservices segment decreased 6%.[26] As of the end of Q3 2010, the company has a 63.4% market share of the US soup market, while all other branded competitors hold only 24.6% and private labels have 12%.[27]

Q4 2010

In the fourth quarter of 2010, Campbell Soup Company's revenues were $1.52 billion, a decrease of 1% from Q4 2009; net income for the quarter increased nearly 64% from the previous year.[28] Revenues for US Soups, Sauces, and Beverages only decreased 1% despite a 5% decrease in soup sales. Beverage sales increased by 12% driven by stronger V8 sales. Revenues from Baking and Snacking increased 3% however this was the result of 6% growth from improved currency exchange rates in the face of decreased sales for Pepperide Farm products.[29] Declining sales in Europe and Canada drove International Soups, Sauces, and Beverages revenues down 3% from the previous year. Positive growth in Asia Pacific and favorable exchange rates added 1% to counter a 4% drop in sales.[30] The North America Foodservice segment's sales decreased by 7%, representing at least the second quarter in a row that this segment's revenues have dropped. Decreased volume and increased promotional spending hurt the segment's income during the quarter while the favorable currency exchange rates did little to moderate these forces.[31]

Q1 2011

During the first quarter of FY 2011, the Campbell Soup Company’s total sales were $2.17 billion, a decrease of 1% from Q1 2010; net income for the quarter decreased 8% to $279 million. Operating income decreased 7% to $444 million.[32] A 5% decrease in US Soup sales was the main reason for the decreased revenue as an increase in promotional spending failed to generate the expected sales increase. In particular, ready-to-serve soup sales fell by 13%. Sales of V8 brand beverages increased by double-digits, but this was offset by lower sales for Prego pasta sauce and Pace Mexican sauce.[33] Baking and Snacking segment sales increased by 3% during the quarter, driven by positive currency exchange rates; higher promotional spending offset a 1% increase in volume. International Soup, Sauces, and Beverages sales decreased 1% during the quarter. Increased sales in Germany, Australia, Japan, and Canada spurred a 3% growth in volume that was counteracted by increased promotional spending and lower currency exchange rates. North American Foodservices, the smallest of the four segments, had sales drop 4% as the food service sector in the United States continues to struggle in the current economic climate.[34]

Business Segments
U.S. Soup, Sauces and Beverages (48% sales, 64% income)
Campbell's U.S. Soup, Sauces and Beverages segment generates the bulk of the company's revenues and operating income. U.S. Soup, Sauces and Beverages include products such as Campbell’s condensed and ready-to-serve soups; Swanson broth and canned poultry; Prego pasta sauce; Pace Mexican sauce; Campbell’s Chunky chili; Campbell’s canned pasta, gravies, and beans; Campbell’s Supper Bakes meal kits; V8 juice and juice drinks as well as Campbell’s tomato juice[35]. The company's 2010 market share in the "wet soup" market was 63.6%.[36]

Baking & Snacking (26% sales, 22% income)
Campbell's Baking and Snacking segment includes, Pepperidge Farm cookies, crackers (such as goldfish), bakery and frozen products in U.S. retail. The segment also includes Campbell's Arnott’s of Australia which is the largest biscuit and second largest snack producer in the country. Arnott's also has a significant presences in the Asia Pacific region.[37] The company is considering making a 1.5 billion pound (roughly $2.3 billion) bid to purchase UK company United Biscuits.[38]

Int'l Soup, Sauces and Beverages (18.5% sales, 11% income)
The International Soup, Sauces and Beverages segment includes the soup, sauce and beverage businesses outside of the United States, including Europe, Mexico, Latin America, the Asia Pacific region and the retail business in Canada. Campbell's sells the Erasco and Heisse Tasse soups in Germany, Liebig and Royco soups in France, Devos Lemmens mayonnaise and cold sauces and Campbell’s and Royco soups in Belgium, and Bla Band soups and sauces in Sweden. In Asia Pacific, the company markets it's Campbell’s soup and stock, Swanson broths and V8 beverages. In Canada, operations include Habitant and Campbell’s soups, Prego pasta sauce, V8 beverages and certain Pepperidge Farm products[39].

North American Foodservice (7.5% sales, 3% income)
The North America Foodservice includes Campbell's Away From Home operations which distributes its products to restaurants, schools, colleges & universities, health care, adult cash, convenience stores, vending, and delis in the United States and Canada[40].

Campbell Soup Company's products are generally resold to consumers in retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores and other retail, commercial and non-commercial establishments.[41] Campbell's largest customer is Wal-Mart (WMT) which accounted for accounted for approximately 18% of the company’s consolidated net sales during fiscal 2010, 2009 and 16% during fiscal 2008.[42] No other customer accounts for more than 10% of Campbell's net sales.[43]

Trends and Forces

Healthy Living
The shift to healthy living in recent years has affected Campbell's in two different consumer groups. The younger consumer group has been shifting towards soup because of its lower calorie content which qualifies it has a healthy meal alternative. The younger, "on-the-go", low-calorie conscious consumers have helped Campbell's gain 70% of the microwaveable, ready-to-serve soup category. On the other hand, baby boomers are more concerned with sodium content because of blood pressure. Baby boomers make up the majority of Campbell's consumer base and because of the baby boomers' dieting trends, Campbell's, as well as other food companies, have had to adjust its product line in order to adapt to the health conscious, lower-sodium diets. Campbell's has developed several new products, including Select Harvest and Healthy Request soups in order to try and win over the more mature age group.[12]

The success of Campbell's low-sodium soups will be important to Campbell's in order to hold on to the majority of the soup market. Since soup is known to be have one of the highest amounts of sodium compared to other processed foods, Campbell's has reduced the sodium content in its soups in order to target the older consumer base who are concerned about high blood pressure, as well as other ailments connected to high levels of sodium.

Besides sodium, Campbell's has also focused on other aspects of its soups. As of 2010, 30% of Campbell's soups offer a full serving of vegetables, 36% have 80 calories or less, while half contain no MSG.[44] The company hopes that these healthier offerings will help gain market share among younger, more health conscious consumers.

Baby Boomers
Since the majority of Campbell's consumer base are baby boomers, low-sodium products are pivotal to Campbell's long term success. The majority of baby boomers' diets are comprised of low sodium . High cholesterol, attributed to high levels of sodium intake, is the number one diagnosed health condition for the baby boomer generation. Since condensed soups have one of the highest sodium contents of all processed foods, challenge. Campbell's must market its new low-sodium product for consumer .
Campbell's Soup Company has relied on the success of its soups for over 125 years. In 2006, soup sales made up 55% of total sales and a total of 65% of profits. The condensed style soup made up 15% of total soup sales alone. In recent years, Campbell's has been pushing their other branches, such as Baking and Snacking and International Soups and Sauces, in order to produce more consistent profits. This has allowed their other segments to slowly mature. From 2004 to 2005, the Baking and Snacking segment experienced a 19% increase in earnings, International Soups and Sauces went through a 12% increase and the Other category went through a 9% increase in earnings.

Although Campbell has a steady foothold in the American soup market, its international sector isn't faring as well. Campbell has the lowest international exposure than its competitors, which directly correlates to its slow international growth rate. Campbell's global growth rate is about 1.5% behind that of its peers. However, Campbell has renewed its focus on the emerging markets of Russia and China. These two markets account for 50% of Campbell's total international soup sales.[45] Additionally, total sales in Russia and China did not slowdown in 2008, even during the financial crisis.[46] Though profits remain low in these regions as a result of the high capital expenditures necessary to establish business, the company has made significant inroads and continues to invest there.[12]

In early 2011, Campbell announced a new joint venture with Swire Pacific. Swire has been Campbell's distribution partner in China since 2007 but the new venture is expected to increase the efficacy and permanency of this partnership. China is the world's largest soup market with nearly 355 billion servings of soup consumed annually, however almost all of them are homemade.[47]

Organic Growth
Campbell's does not have a set long term growth plan, except to try to expand organically. Organic growth is when a company attempts to expand by simply increasing output and enhancing sales, and essentially represents the true growth of the core of the company. Organic growth can be a good indicator of how well Campbell's management uses their resources to expand profits and does not include acquisitions, mergers, or takeovers. Campbell's plan to grow organically won't affect sales in the short run, and may only affect sales in the very long run.

Campbell's organic growth plan has kept Campbell's above the U.S. competition, but with low international exposure and a slowing soup market, organic growth might not be enough to rely on. They will have a difficult time producing the same amount of economic profit without the continued growth of the soup market. Once the U.S. soup segment has been exhausted, Campbell's won't have another means for long term growth.

Recent moves however, may signify a shift in strategy. As of June 30, 2010, Campbell's had sold $400 million of seven-year bonds, whose profits are tagged for general corporate purposes including repaying debts and possibly financing future acquisitions. The company has said that it is aggressively seeking takeover opportunities, and with the company's increased financial flexibility, analysts are expecting the company to make an acquisition in the near future. Campbell's last acquisition was in 2009 when the company bought breadmaker Ecce Panis.[48]

Campbell's uses a number of different products in order to produce, package and deliver its soups. In the past, Campbell's has been able to keep production costs low, but rising prices of those commodities will negatively affect pricing. Campbell's does not directly compete with generic soups because of their ability to keep soup production costs, and prices low. Increased soup prices would be detrimental to soup sales because of increased competition with lower priced generic soups.

In order to produce their soups, Campbell's needs products such as vegetables, tomato paste, beef and poultry. Price increases for these food products would be affected by bad weather, rising gas prices or changes to government-sponsored agricultural programs. Bad weather will attribute to a bad growing season and make these raw materials more expensive due to scarcity. Rising gas prices will increase transportation costs and ultimately increase the price of the soup itself. If the government decides to stop, or decrease, subsidizing farmers, the price of materials will increase. Also, changes to import or export taxes would also increase transport costs, which would directly lead to increases in soup prices.

In addition to soup ingredients, Campbell's uses a variety of metal, glass and paper to package its products. Price increases to these raw materials directly relates to soup product pricing. Prices would be affected by volatile oil prices and scarcity.

Campbell Soup Company and the Competition

Campbell's main competitor is General Mills' Progresso brand. Progresso has low-sodium, Ready-to-Serve and Rich and Hearty soups, which directly mirror Campbell's Healthy Request, microwaveable/Soup at Hand and Chunky soups. Progresso's low-sodium soups were released shortly before Campbell's and have been successful, which poses a challenge for Campbell's marketing team. Campbell Soup Company can stay ahead of competitors if it can correctly adjust with new consumer trends, such as healthy eating.

Campbell's faces an extremely competitive market because of the similarities between each soup producer. Campbell's will have to maintain its gourmet soup reputation, as well as continue to develop new soups to distinguish itself from Progresso and other smaller soupmakers.

Generic soup brands are not a pressing threat to Campbell's because of their ability to keep production costs very low. This allows Campbell's to price their soup products only 20 to 25% higher than generic brands while maintaining a level high quality. Campbell's production costs would be affected by a rise in produce costs, as well as volatile gas prices. If those prices dramatically rise, then generic soup brands would add another fierce competitor to the already extremely competitive soup market.

Campbell's v. Progresso
Company Total Sales (2006) (mil) % of U.S. Soup Sales Sales Growth (2005 vs 2006) No. of Soup Lines Market Share
Campbell’s $7,587 47% ~4% 7 60%
General Mill's $12,172 6% 3.4% 4
Chart 4. Source: Company Data

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