Campbell Soup Company CPB has strategically focused on strengthening its snacking division, which has demonstrated strong resilience despite various challenges. As part of its efforts to increase this focus, CPB has outsourced its popcorn business, Pop Secret, to Our Home, a company specializing in healthier snacking options.
Given net sales of approximately $120 million in fiscal 2024, the divestiture of the Pop Secret business is expected to be nearly 4 cents dilutive in fiscal 2025.
Sale of Pop Secret strengthens CPB’s snack division
This divestiture will allow Campbell to further prioritize its snack segment, which contributed 46.3% of the company’s revenue in the third quarter of fiscal 2024. Over the past three years, the snack category has shown remarkable resilience with minimal price sensitivity. Despite a recent slowdown due to ongoing economic pressures on low- and middle-income consumers, the division still experiences average consumption growth of 8%, outperforming both overall grocery and historical snack growth.
This slight slowdown is modest compared to other edible categories and underscores continued consumer demand for snacks. Although revenues in this segment declined year-over-year in the third quarter of fiscal 2024 due to declines in lower-margin partner brands, contract manufacturing and fresh baked goods, the company continued to see strength in its strong brands such as Goldfish and Late July.
With Power Brands now accounting for two-thirds of the company’s snack business, they provide a solid foundation for sustainable growth. Campbell is well on its way to developing a clear strategy to accelerate the growth of its Power Brands and optimize the remaining parts of its existing snack portfolio. Despite the current challenges, the division’s resilience and long-term growth potential make it an important part of Campbell Soup’s overall portfolio.
Strategic steps move Campbell Soup forward
Prudent acquisitions and divestments have been a key part of Campbell’s success story. The company acquired Sovos Brands in March 2024, generating impressive gains from the acquisition. Sovos Brands’ portfolio includes a diverse range of products, including pasta sauces, dried pasta, soups, frozen meals, frozen pizza and yogurts, sold under the Rao’s, Michael Angelo’s and Noosa brand names.
Campbell Soup’s reported revenues increased 6% in the third quarter of fiscal 2024, driven by Sovos Brands’ partial quarterly sales. Specifically, Sovos Brands contributed 7 percentage points to reported net sales growth, exceeding original expectations. The performance of Sovos Brands, particularly Rao, was outstanding. Revenues grew faster than expected and contributed positively to adjusted earnings before interest and taxes (EBIT). Management remains confident about Sovos Brands’ long-term revenue growth and expects mid-single-digit growth.
Campbell Soup expects increasing momentum in the fourth quarter, characterized by steady year-over-year volume growth, double-digit increases in both adjusted EBIT and adjusted EPS, and continued progress in the integration of Sovos Brands.
Driven by these positive developments, CPB shares have gained 14.8 percent over the past three months, while the industry has grown just 3.9 percent. The company’s growth efforts have also helped it outperform the broader Zacks Consumer Staples sector and the S&P 500, which have grown 3.9 percent and 6.2 percent, respectively, over the same period.
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Is CPB stock free of challenges?
Like other food companies like General Mills GIS-Systems, Brand Conagras CAG and Flowers Food FLO, Campbell Soup remains impacted by a dynamic macroeconomic scenario. The company is observing volatile consumer behavior, particularly in the lower-income segments. The persistence of these headwinds could be a cause for concern. CPB expects organic net sales growth to be nearly flat or down 1% in fiscal 2024. In its third-quarter earnings release, management stated that it would then approach the midpoint of this updated organic sales growth forecast, indicating the pace of consumer recovery.
Campbell Soup has also been experiencing cost inflation for some time. In the third quarter of fiscal 2024, the company experienced core inflation in the low single digits and expects it to remain in that range for the remainder of fiscal 2024. Campbell Soup remains focused on managing areas of its portfolio affected by rising input costs such as tomatoes, olive oil and cocoa, as well as ongoing inflation in labor and inventory costs. However, the company’s productivity initiatives and cost-saving programs should effectively offset the impact of inflation in the fourth quarter.
How should CPB investors proceed?
Campbell Soup’s strategic focus on the snacks division and divestment of non-core assets such as Pop Secret shows that the company is committed to optimizing its portfolio for long-term growth. The resilience of its strong brands and the successful integration of Sovos Brands are positive indicators for future performance. However, ongoing challenges such as volatile consumer behavior and cost inflation cannot be ignored. Potential investors should carefully consider these short-term hurdles, but current shareholders may find it prudent to maintain their positions in this Zacks Rank #3 (Hold) company given its overall outlook.
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