Campbell Soup Is Leaving Investors Cold

CEO Douglas Conant's turnaround strategy is struggling somewhat as several trends work against the venerable prepared-food company

By Amy Tsao

The brutal winter should've been great for Campbell Soup Co. (CPB ), but it wasn't. It reported that earnings per share hit 56 cents, a 12% rise, on a 6% sales gain, to $1.9 billion, in its latest quarter. Soup made up $824 million, or 43%, of sales. While the country's biggest prepared-soup maker performed well in November and December, sales in January, the coldest and last month of its fiscal second quarter, disappointed investors.

Campbell CEO Douglas Conant says the soup unit's 8.5% decline in January sales was caused by poor execution with retailers, who didn't allot enough in-store displays or trade promotions for Campbell's products. The misstep, he says, has been remedied and should not affect future sales.

Analysts weren't assuaged. Instead, many lambasted Campbell for not being able to capitalize on the perfect soup-slurping conditions. "With the weather so cold and [good] acceptance [of the new Soup at Hand product], you should've gotten more volume," Jaine Mehring of Salomon Smith Barney told the concern during a Feb. 13 conference call with analysts. Mehring is one of the few analysts who rate Campbell shares better than hold. (Salomon has received banking fees from the soupmaker in the past 12 months.)

NOT CHEAP ENOUGH?

  Now around $20, the shares are trading near their 52-week low. That's cheap, at 13 times fiscal 2004 earnings. Apparently, though, not cheap enough. Only 3 of 13 analysts rate the stock a buy or strong buy. "If it fell below $17, it would start to be cheap enough to compensate for the risks involved," says David Kathman, a stock analyst for Morningstar, which rates mutual funds.

In recent years, Campbell has been funneling more dollars into research and development as well as marketing. And products like portable soups and packaging features such as easy-to-open tops have been well received. But Camden (N.J.)-based Campbell is about halfway through a three-year turnaround plan Conant started in July, 2001, and the risks today are nearly as high as they were at the beginning of the project, analysts say.

One problem is that broad trends are working against Campbell. The overall market is growing anemically, and the outfit is losing its dominance. In the 12 months ended Jan. 26, sales of its core condensed-soup business, of which it has about 83.7% of the market, fell to $1.09 billion from $1.35 billion in 1999, according to market researcher Information Resources. "They can put the brakes on [the slide,] but they won't be able to stop it," says Kathman.

AGAINST THE TIDE.

  Consumers continue to dine out more often. And as baby boomers age, warmer climes are on the receiving end of an ongoing population shift. That's expected to keep soup consumption slowing, says David Cairns, consumer-products analyst at independent stock-research firm Argus Research. Meantime, at-home cooks demand more and improved convenience. Even with better packaging and efforts to enhance taste, condensed soup -- Campbell's mainstay -- looks less appealing next to a myriad of quicker and tastier options.

Despite innovations, "the long term is not a good situation," says Cairns. He has had a sell rating on the stock for the last couple of years and notes: "It's hard to believe things will get much better." Campbell is "running up against social change. It's not what the consumer wants," says David Kolpak, analyst at Victory Capital Management.

Campbell is also the top maker of ready-to-serve soups with its Chunky and Select brands. Thankfully for Campbell, that category is growing, with 1999 industrywide sales of $1.27 billion swelling to $1.78 billion for the 52 weeks ending Jan. 26. But margins aren't as good as they are for condensed soups. Even worse, Campbell's share in that market is declining. It had 59% of the ready-to-serve market in 1999 but a 56.9% share as of early January, 2003. Distant-second competitor Progresso appears to be closing the gap, with its share rising from 20.3% to 23.8% over the same period.

MAKING SOUP FUN.

  A big part of Campbell's comeback strategy relies on its ability to change the way consumers feel about condensed soup. "All of our testing says if we can upgrade the product and packaging, we can maintain our competitive position," says Campbell spokesperson Michelle Davidson. Clearer categorizing of the soups on the supermarket shelf is already being implemented in an effort to get shoppers to think of soup as a fun meal for kids, a meal for dinner, or as a sauce for cooking.

Campbell is also tweaking the taste and creaminess of many of its condensed soups. Before next winter, it will also offer more varieties of Soup at Hand (soups in plastic containers that can be held in one hand and sipped), including pizza and Mexican flavors aimed at kids who are age 10 to 14. Microwavable "to-go" soup bowls are also expected by the next season. And Campbell is setting up new distribution channels, including vending machines and college cafeterias.

Yet Standard & Poor's analyst Rick Joy doubts that the efforts will be enough to transform Campbell's soup lines into a sought-after convenience food. "I don't see how they will stem the decline in the soup business without moving to lower price points." And the outfit is already fighting the onslaught of lower-priced store brands that are cutting into market share, Joy says. (He doesn't own shares and has rated the stock a sell for the past year.)

COOKIES AND SALSA.

  Outside of the soup business, Campbell's performance is mixed. "Other divisions are good, but soup really needs to be fixed," says Joy. "You have to turn the soup around to turn the whole company around." Product lines like Godiva and Pepperidge Farm are growing at a steady clip. Campbell reported a 14% sales rise year-over-year, to $486 million, in its latest quarter for its biscuits and confectionery business. Its North American sauces and beverages business, which includes Prego pasta sauce, Pace salsa, Franco-American, and V8, chalked up flat sales of $318 million in the last quarter over the same period the previous year.

Some pros are sticking with Campbell's stock, figuring that its attempts to preserve the soup market will succeed ultimately. "I'm on the fence, leaning toward bullish," says US Trust analyst Herb Achey. He believes that the fruits of the turnaround will be clear by early 2004 and that the stock could rise to $26 over the next 12 to 18 months. "It's a risky proposition -- but with a lot of reward." (US Trust funds have held Campbell stock since August, 1999.)

Wall Street's patience, though, is wearing thin. A single month of disappointing sales may not be reason to panic, but Campbell has to prove that steps Conant's team is taking will yield improved performance over the long haul. Without that, the soupmaker will be hard-pressed to find new shareholders.

Tsao covers financial markets for BusinessWeek Online in New York

Edited by Beth Belton

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