Campbell Soup Co.’s shares slid in the wake of the release of the US company’s annual results, which included lower sales and earnings – but improved profitability on an “adjusted” basis. The numbers revealed issues with the company’s Campbell Fresh division, key to its bid to accelerate growth while its flagship business remains sluggish. The announcement also included guidance for the 2016/2017 financial year that disappointed analysts. Here are our top takeaways from the numbers.

2015/2016 – profit growth but sluggish sales

The 12 months to the end of July was the first year of business for Campbell Soup Co.’s new business structure – and it delivered improved underlying profitability but a still stagnant top line.

In January 2015, Campbell announced plans to revamp its organisation into three divisions: Americas simple meals and beverages; global biscuits and snacks and Campbell Fresh. The move was, president and CEO Denise Morrison said at the time, designed to “help unlock the value of our brands and the growth potential of our business”. She added: “It will drive focused investment on our largest growth opportunities. It is the logical next step in our ongoing effort to shift our company’s centre of gravity, accelerate our growth trajectory and maximise value for our shareholders.”

The reorganisation went live ahead of the financial year Campbell has just completed, one which saw the company grow EBIT by 11% on an adjusted basis but report another year of declining net sales, which fell 1% – and were also down 1% on an organic basis.

Campbell said the net sales from its Americas simple meals and beverage arm – its largest by sales – fell 1% on an organic basis. By the same metric, net sales the Pepperidge Farm maker’s global biscuits and snacks division inched up 1%. Sales from Campbell Fresh, which supplies products including carrots, dressings and salsa, slid 4%.

Morrison unhappy again

“We finished the year in line with our guidance, including strong profit performance. However, I am not pleased with the results of our fourth quarter,” Morrison said as she announced Campbell’s annual and quarterly results on Thursday (1 September).

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Morrison’s remarks were unusual in their candour but it was the second set of quarterly results in a row in which she had expressed dissatisfaction with the company’s performance. It was the Campbell Fresh arm that under-performed during the fourth quarter. Campbell Fresh’s sales fell 5% during the three months to the end of July but, worse than that, excluding the contribution from recent acquisition Garden Fresh Gourmet, the salsa maker Campbell snapped up last June, the division’s sales tumbled 12% amid lower sales of carrot, carrot ingredients and Bolthouse Farms chilled drinks. Furthermore, earnings from the division slumped 62% thanks to an increase in carrot costs and the impact of a recall of a Bolthouse Farms drinks line.

The Campbell chief pointed to “short-term executional issues” and insisted the company is still “confident” about the unit’s ability to “capitalise on the health and well-being consumer trend”.

What went wrong with Fresh?

The product recall was one reason for Campbell Fresh’s poor performance in the company’s fourth quarter, which, the business no doubt hopes, will be a temporary drag on results.

However, it is in carrots and carrot ingredients where Campbell Fresh appears to face the biggest challenge. A series of decisions earlier in the year led to the company growing smaller carrots – which in turn led to lost business.

“The problems were rooted in several decisions that had compounded one and another,” Morrison said. “There were some planting, harvesting and commercial decisions made earlier in the calendar year that exacerbated the weather problems. This led our farm’s operation to harvest carrots prematurely in an attempt to meet customer demand. Ultimately, this resulted in a spring crop that yielded smaller carrots, which led to customer dissatisfaction and an additional loss of business. The carrot business is right now going through a short-term issue. And fortunately, it is a short-term crop, and the crop we’re harvesting now is much better. So we believe we will be back in business at pretty normal levels by about the second half of the year.”

The issues with the Bolthouse Farms carrot and carrot ingredients part of the division led Campbell to book an impairment charge of US$141m in its fourth quarter. The company said it took the charge to reduce the “carrying value” of the intangible assets of the unit. 

What’s Campbell doing about it?

Campbell Fresh is the vehicle through which the company hopes to capitalise on growing consumer interest in North America in healthier products, while demand for the company’s flagship products like soup remains flat at best.

The company made a big bet on the healthy-eating trend in 2012 when it paid $1.55bn to add US carrots, dressings and juices business Bolthouse Farms to its portfolio. At the time, the move looked a wise one for a business struggling to eke out growth from its traditional products but there sounded like there is frustration at Campbell’s New Jersey HQ about the recent performance of Campbell Fresh.

“I expect far more from the Campbell Fresh business. It’s clear that we have several immediate challenges in Campbell Fresh, and we are addressing them,” Morrison told analysts on a conference call to discuss the company’s results.

And Morrison sought to emphasise the role carrots play in the Campbell Fresh division. “Carrots are a relatively low-margin business [but] serve as the chassis for our higher-margin value-added CPG business,” she insisted. “Carrots provide the scale for the refrigerated logistics system that we leverage for distribution and merchandising.”

Campbell, Morrison insisted, has made “major organisation changes” to Campbell Fresh. A number of managers, including the president of Bolthouse Farms, have left the business. Campbell Fresh’s two units have become three, while Morrison said the company has created “a more integrated structure both at the divisional level and with Campbell”, adding: “In particular, we have strengthened the integration and oversight of the Campbell Fresh supply chain.”

However, Morrison admitted it will be over a year before the division sees growth from its carrots business. “It will take us time to regain the lost business. As a result, we now expect fiscal 2017 carrot sales to be comparable to fiscal 2016, rather than benefiting from a recovery from last year’s issues.”

That said, Campbell was pressed on the conference call whether the impairment charge means that side of the business is no longer going to be as strong as the company had initially expected. CFO Anthony DiSilvestro said: “While we expect the performance to improve over time, it’s not to the levels previously anticipated and consequently led to the impairment charge.”

The latest on soup

Soup, the flagship of the business, has long been a challenge for Campbell, with the company in recent years pulling all the usual levers (innovation, marketing, promotions) to try to get sales going.

In its 2015/2016 financial year, sales from Americas simple meals and beverages, the division that houses the bulk of Campbell’s soup business (it sells some fresh soup through Campbell Fresh), were down 1%.

Campbell’s US soup sales fell 2%, with sales of its condensed soup down 1% but sales of its ready-to-serve soup sliding 6%. The company did see sales of its Swanson broth grow 7%. “Many of our brands are performing in line with the categories in which we compete. However, portions of the portfolio are underperforming their categories, in particular beverages and ready-to-serve soup,” Morrison reflected.

Citing IRI data, Morrison said the US wet soup category fell 2.7% during the year to the end of July. Campbell’s sales in those measured channels dropped 3.8%. The company still accounts for 59% of the category but that was down 70 basis points. Private label grew its share by ten points, while “gains by smaller brands” led all other brands to increase their collective share by 60 points to 29%.

Investors looking for detailed numbers on the performance of the different parts of Campbell’s US soup business in the quarters ahead will be disappointed. “We will discuss the key drivers of soup performance as we do with our other businesses [but] this is the last quarter we will provide detailed subcategory sales performance,” Morrison said.

However, she added: “We expect our soup business to grow behind continued growth of broth and better performance from our ready-to-serve soup portfolio.”

In the coming year, Morrison wants to see “improved execution” behind its Chunky soup line, while the company is set to try to target its soup business at the emerging consumer trends in the US, with the launch of what Morrison called a “new clean-label soup line” called Well Yes.

In all, Morrison expects its US soup business to grow “modestly” this year. Of course, Campbell would want more but it appears a realistic assessment and one that seems to fit how the company sees the Americas simple meals and beverages divsions overall. When Campbell announced the creation of the three in January 2015, it described Americas simple meals and beverages as a division that would “deliver moderate top-line growth” and “significant margin expansion”. The unit’s earnings rose 4% last year on the back of higher gross margins.

However, the jury is out on whether Campbell can get its US soup sales growing in a declining category and one where own label or smaller brands are the ones enjoying the growth.

The new financial year

When Campbell announced its annual results last week, any number of things could have been the cause of the fall in the company’s share price. Alongside the impairment charge on the Bolthouse Farms carrots unit, Campbell’s fourth-quarter sales and adjusted earnings per share were both below the consensus forecasts from analysts.

However, some investors would no doubt have been concerned about Campbell’s forecasts for its new financial year. For the new financial year, Campbell expects its sales to fall in a range of being flat to up 1%. It expects adjusted EBIT to increase by 1-4% and its adjusted earnings per share to rise by 2-5%.

Sanford Bernstein analyst Alexia Howard described the guidance as “disappointing”, noting the company forecast results would be “relatively stronger” in the second half of the year, which she suggested could mean “an especially weak 1H17, with declining year-on-year sales – and perhaps EBIT and EPS too.”

Campbell is set for “much stronger marketing investment” in the first half of the year, with “big campaigns” for the company’s Americas simple meals and beverage business, Morrison said, as the company seeks to re-invest some of the cost savings it has recently found. DiSilvestro also ran off a list of other areas in which Campbell plans to invest – e-commerce, innovation and growing distribution in China.

Morrison added: “Our challenge is top line growth. So these investments are really vital to long-term health of the sales line of the company.”

A key question for investors will be: will Campbell have to make similar investments in the 2017/18 financial year to try to breathe life into its top line?

“Given its tepid top-line performance, we suspect Campbell will need to increase brand spending as a means by which to differentiate its product set in the ultra-competitive landscape in which it plays. Supporting our perspective, research and development and marketing increased 8% and 14%, respectively, in the quarter–investments that we think will persist,” Morningstar analyst Erin Lash wrote in a note last week.