High Costs Blur Prospects For Campbell's (CPB) Q2 Earnings

Campbell Soup Company (NYSE:CPB) is slated to release second-quarter fiscal 2019 results on Feb 27. The company’s earnings have surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 13.7%. Let’s see what’s in store for this branded convenience food products company this time around.

Factors Aiding the Company

Campbell is progressing well with cost-savings plans, which includes enhancing supply-chain efficiencies along with curtailing costs. In the last reported quarter, the company generated savings worth $45 million as part of the multi-year cost-savings program. Such savings are reinvested by the company in areas with high growth potential. These efforts along with strategies to refine portfolio and build brands are likely to boost growth.

Speaking of portfolio refinement, Campbell strives to expand presence in the rapidly growing snacks category. In fact, the snacking business is expected to contribute about half of the company’s proforma sales in future. Markedly, Campbell’s buyout of Snyder's-Lance is expected to create a distinguished snacking business and enhance the performance of the global biscuits and snacks portfolio.

Campbell is also keen on boosting portfolio through acquisitions. Apart from Snyder's-Lance, the company acquired leading organic broth and soup producer, Pacific Foods, to expand in the fast-growing organic food space. Notably, contributions from Snyder's-Lance and Pacific Foods drove Campbell’s top line by 25% in first-quarter fiscal 2019. Apart from these, the company has purchased Bolthouse Farms and Garden Fresh Gourmet.

Campbell Soup Company Price, Consensus and EPS Surprise

Hurdles in the Path

Although the aforementioned factors are encouraging, there are significant challenges in Campbell’s path. The company has been grappling with soft U.S. soup sales for a while, which are weighing on organic sales. Notably, U.S. soup sales are being hampered by greater market competition and promotions. Moreover, the company expects U.S. Soup business to fall in fiscal 2019, wherein organic sales are expected to fall marginally. This mars hopes for the company’s fiscal second-quarter results.

To top these, Campbell is grappling with strained gross margin performance, stemming from cost inflation, escalated supply-chain expenses and increased promotional spending. Cost inflation for items like dairy, steel cans, wheat, vegetables and resins along with persistent rise in transportation and logistics expenses are hurting profitability. Moreover, management expects fiscal 2019 gross margin to decline nearly 2 percentage points. In fact, cost inflation, which is a threat to fiscal second-quarter earnings, is weighing on many other food companies like Conagra Brands (NYSE:CAG) , General Mills (NYSE:GIS) and Lamb Weston (NYSE:LW)

What to Expect?

The Zacks Consensus Estimate for earnings for the impending quarter went down by a penny in the past 30 days to 70 cents per share, which reflects a decline of 30% from $1 in the year-ago quarter. Nonetheless, the consensus mark for revenues is pegged at $2,692 million, reflecting close to 24% growth from $2,180 million in the year-ago quarter.

What the Zacks Model Unveils

Our proven model doesn’t show that Campbell is likely to beat bottom-line estimates this quarter. For this to happen, the stock needs to have 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

Although Campbell has an Earnings ESP of +2.37%, its Zacks Rank #4 (Sell) makes us apprehensive about an earnings beat. Markedly, we caution against sell-rated stocks (Zacks Rank #4 or 5) going into earnings announcement.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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