Campbell Soup Earnings: Stepped-Up Competition Amid Weak Consumer Spending Overshadows Strong Sales

The market soured on wide-moat Campbell Soup CPB even after it posted decent third-quarter marks—5% organic sales growth and 60 basis points of adjusted gross margin degradation to 30.9%—as seen by the 8% rout in shares. We attribute the reaction to concerns surrounding the competitive backdrop (which management suggested has gotten more promotional) and the state of consumer spending (which has weakened). But the firm appeared unmoved, reaffirming its outlook for 8.5%-10% sales growth and $2.95-$3.00 in adjusted EPS, which square with our 9.4% and $2.96 respective estimates before earnings. We don’t expect to alter our $58 fair value estimate (beyond time value) or our long-term forecast (low-single-digit sales and high-single-digit adjusted EPS growth) but now view shares as attractive, trading at a 20% discount to our valuation.

The fact that pricing was again a significant driver of both Campbell’s top line (up 12%) and gross margin performance (an 880-basis-point benefit) brings to light why the market moved against shares. To the extent that promotional spending reemerges within the industry as a tactic through which to gain market share (after remaining benign the past three years), Campbell (and its peers) won’t be able to tap the pricing lever in the near term. This would be further exacerbated if consumers increasingly tighten their purse strings. However, we never suspected pricing was a limitless well. Rather, Campbell is still pursuing other means to offset these pressures (namely, unearthing inefficiencies and dialing back discretionary spending) to dull the drain on profits. And despite facing elevated costs (an 8% hit in the quarter), management continues to invest in its brands—leveraging technology, data insights, and artificial intelligence to bring consumer-valued innovation to market in a timely fashion. Our forecast calls for it to direct 5% of sales (around $500 million) on average annually to research, development, and marketing through fiscal 2032.