Campbell Soup Co. Reports 4 Percent Earnings Decline In Second Quarter

Campbell Soup Co. reported its results for the second quarter of fiscal 2011.

Net earnings for the quarter ended Jan. 30, 2011 were $239 million compared with $259 million in the prior year, a decrease of 8 percent. Net earnings per share were $0.71 in the current quarter compared with $0.74 in the prior period, a decrease of 4 percent.

Douglas R. Conant, Campbell's president and CEO, said in a prepared statement, "The overall competitive environment remains challenging throughout the food industry, particularly in the U.S. In U.S. soup, as planned in the second quarter, we maintained strong levels of advertising and promotional support to defend our consumer base. As a result of this support, externally measured consumer takeaway volume at retail in U.S. Soup grew during the quarter. However, our high levels of promotional spending in the quarter did not deliver planned sales lifts and negatively impacted margins. As we stated at the end of the first quarter, in the second half we will more heavily leverage advertising and brand building initiatives while reducing our reliance on trade promotions. We expect that improved price realization will lead to better profitability and strengthen our financial position in anticipation of higher cost inflation going forward.

"Baking and Snacking, our second largest segment, delivered top and bottom line growth in the quarter. This performance reflected our consistent innovation, compelling advertising and effective promotional activities."

Campbell anticipates continued competitive pressure in its U.S. soup, sauces and beverages segment in the second half of the year. Due to the intense competitive environment, the company expects its growth in the second half of the year will be at more modest rates than previously anticipated and will come largely in the fourth quarter.

Campbell revised its full-year fiscal 2011 guidance and now expects net sales to be between 1 and (1) percent, adjusted EBIT to decline between 3 and 5 percent and EPS to decline between 1 and 3 percent from the fiscal 2010 adjusted base of $2.47.

For the second quarter, sales decreased 1 percent to $2.127 billion. The decrease in sales for the quarter reflected the following factors:

  • Increased promotional spending subtracted 2 percent;
  • Currency added 1 percent.

Gross margin was 39.4 percent compared with 40.5 percent a year ago. The decrease in gross margin percentage was primarily due to increased promotional spending and cost inflation, partially offset by productivity improvements.

Marketing and selling expenses decreased to $291 million compared with $301 million in the prior year, reflecting reduced levels of advertising and lower selling expenses.

EBIT was $359 million compared with $391 million in the prior-year quarter. EBIT decreased 8 percent primarily due to increased promotional spending.

Campbell repurchased 12 million shares in the current quarter for $417 million under its strategic share repurchase program announced in June 2008 and the company's practice of buying back shares sufficient to offset those issued under incentive compensation plans.

Net earnings for the first half were $518 million, or $1.53 per share, compared with $563 million, or $1.61 per share, in the year-ago period. Net earnings per share decreased 5 percent.

For the first half of fiscal 2011, sales were $4.299 billion, a decrease of 1 percent from the year-ago period. The change in sales for the period reflected the following factors:

  • Increased promotional spending subtracted 2 percent;
  • Currency added 1 percent.

Gross margin was 40.3 percent compared with 41.2 percent a year ago. The decrease in gross margin percentage was primarily due to increased promotional spending and cost inflation, partly offset by productivity improvements and favorable mix.

Marketing and selling expenses decreased $17 million to $568 million, primarily due to lower selling expenses.

Administrative expenses increased $12 million to $294 million, primarily due to higher pension and benefit costs, costs associated with the new headquarters facility, information systems related costs and currency, partly offset by lower compensation expenses.

EBIT was $803million compared with $869 million in the prior year. EBIT decreased 8 percent primarily due to increased promotional spending and cost inflation, partly offset by productivity gains and favorable mix.

Cash flow from operations was $483 million compared with $496 million in the year-ago period. The current-year cash flow reflected higher working capital requirements and lower earnings, mostly offset by the benefit of lower pension contributions.

Year to date, Campbell repurchased 16 million shares for $573 million.

Sales for U.S. soup, sauces and beverages were $1.022 billion for the second quarter, a decrease of 4 percent compared to a year ago. The change in sales reflected the following factors:

  • Volume and mix subtracted 1 percent;
  • Increased promotional spending subtracted 3 percent

U.S. Soup sales for the quarter decreased 4 percent reflecting higher levels of promotional spending which did not deliver the anticipated volume gains. Soup sales were also negatively impacted by movements in customer inventory levels.

Sales of "Campbell's" condensed soups decreased 7 percent reflecting declines in both cooking and eating varieties. Sales of eating varieties continued to be negatively impacted by promotional discounting in the ready-to-serve segment.

Sales of ready-to-serve soups decreased 4 percent primarily due to declines in microwavable soups. Sales of ready-to-serve canned soups were comparable to a year ago as volume gains, principally double-digit growth in "Campbell's Chunky" soups, were offset by increased promotional spending.

Broth sales increased 7 percent due to strong holiday performance.

Beverage sales decreased 1 percent for the quarter due to the impact of higher promotional spending partly offset by volume gains.

"V8" vegetable juice sales declined due to increased competitive activity, while sales of both "V8 V-Fusion" juice and "V8 Splash" juice drinks increased.

Sales of "Prego" pasta sauce and "Pace" Mexican sauce both declined due to increased competitive activity. "Pace" Mexican sauce was particularly challenged by private label distribution gains.

Operating earnings were $220 million compared with $259 million in the prior-year period. The decrease in operating earnings was primarily due to increased promotional spending and cost inflation, partly offset by productivity improvements.

For the first half, U.S. soup, sauces and beverages sales decreased 4 percent to $2.125 billion. A breakdown of the change in sales follows:

  • Price and sales allowances subtracted 1 percent;
  • Increased promotional spending subtracted 3 percent.

For the first half, U.S. soup sales declined 5 percent due to a 9 percent decrease in ready-to-serve soups and a 4 percent decrease in condensed soups, while sales of broth increased 2 percent. Beverage sales increased 5 percent due to strong volume-driven growth of "V8 V-Fusion" juice and "V8 Splash" juice drinks.

Operating earnings were $515 million compared with $590 million in the year-ago period. The decrease in operating earnings was due to increased promotional spending and cost inflation, partly offset by productivity improvements.

Sales for baking and snacking were $526 million in the second quarter, an increase of 8 percent from a year ago. A breakdown of the change in sales follows:

  • Volume and mix added 4 percent;
  • Price and sales allowances added 2 percent;
  • Increased promotional spending subtracted 1 percent;
  • Currency added 3 percent.

Sales at Pepperidge Farm increased, reflecting volume gains and improved price realization.

North American foodservice sales were $158 million for the second quarter, a decrease of 1 percent compared with a year ago. A breakdown of the change in sales follows:

  • Volume and mix subtracted 3 percent;
  • Price and sales allowances added 1 percent;
  • Currency added 1 percent;
  • Operating earnings increased to $21 million compared with $17 million in the prior period.

For the first half, sales decreased 2 percent to $311 million. A breakdown of the change in sales follows:

  • Volume and mix subtracted 4 percent;
  • Price and sales allowances added 1 percent;
  • Currency added 1 percent;
  • Operating earnings were $44 million compared with $43 million in the year-ago period.

In cookies and crackers, sales increased driven by solid gains in "Goldfish" snack crackers, "Baked Naturals" crackers, and "Milano" and Home-style cookies.

Strong sales growth in bakery products was driven by gains in stuffing, Swirl Bread, and the successful expansion of the "Deli Flats" line.

Operating earnings rose to $81 million compared with $73 million in the prior-year period. The increase in operating earnings was due to volume-driven growth at Pepperidge Farm.

For the first half, sales increased 5 percent to $1.070 billion. A breakdown of the change in sales follows:

  • Volume and mix added 2 percent;
  • Price and sales allowances added 1 percent;
  • Increased promotional spending subtracted 1 percent;
  • Currency added 3 percent;
  • Operating earnings grew to $181 million compared with $173 million in the year-ago period. The increase in operating earnings was due to gains at Pepperidge Farm and the impact of currency, partly offset by lower earnings at Arnott's.

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