Campbell Slumps After Q4 on Concerns Around Competition, Rendering Shares a Touch Undervalued

In our view, the market had little concern for wide-moat Campbell’s seasonally small July-ended fourth quarter (6% organic sales growth and 40 basis points of adjusted gross margin expansion to 31.3% despite an 810-basis-point drag from higher commodity costs), hankering instead for perspective on the competitive and macro landscape. And in this context, we think management expressed some caution, citing increased trade down to lower-priced private-label fare (particularly in condensed soup and broth) and stepped-up promotional spend (relative to the depressed levels that have been customary since COVID-19 hit). Further, Campbell foresees continued inflationary angst, amounting to a low-teens rate in fiscal 2023 on top of the 11% absorbed in fiscal 2022. However, we never anticipated that consumers would continue to digest the rash of price hikes across the grocery store without a bit of indigestion, nor did we posit promotions were a thing of the past. We also surmise that Campbell is pursuing multiple avenues through which to withstand inflation (increasing prices, extracting inefficiencies, and altering price/packs), which we see as prudent.