uploads///Campbell Soups Quarterly Margins

Why Did Campbell Soup’s Gross Margin Improve in Fiscal 1Q16?

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Gross margin improved

In fiscal 1Q16, Campbell Soup’s (CPB) gross margin improved to 37.9% compared to 35.3% in fiscal 1Q15. It excluded items impacting comparability in fiscal 2016. The gross margin was ahead of the company’s expectations mainly due to lower-than-estimated cost inflation along with improved supply chain performance.

The adjusted gross margin for fiscal 1Q15 included a positive impact of 0.6% due to an accounting change. What else drove the gross margin improvement? The answer to this is productivity improvements, lower promotional spending, and higher selling prices.

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Inflation had a slightly negative impact on gross margin

What negatively impacted gross margin was 0.2% from inflation and other factors. Supply chain performance typically balanced the cost inflation of ~1%. This was mostly in the areas of transportation and warehousing. Due to the acquisition, the mix also had a minor negative impact of 0.1%.

Price realization and supply chain productivity programs had a positive contribution of 1.3% and 1.6%, respectively, to gross margin expansion. The price realization included 0.4% from reduced promotional spending, mainly trade reductions in Pepperidge Farm and US soup, and 0.9% from higher selling prices.

Estimates for fiscal 2Q16

Analysts expect gross, operating, and net margin for 2Q16 to be higher compared to 2Q15. The estimates are 35.6%, 17.5%, and 11.3%, respectively. The operating profit and gross profit are estimated to be $343 million and $774 million, respectively, for 2Q16, higher than $312 million and $728 million, respectively, in 2Q15.

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Management’s remarks

Denise Morrison, Campbell’s president and chief executive officer, said, “While organic sales for the quarter were comparable to a solid prior year, we recognize that we have more work ahead to improve our growth trajectory. I am particularly pleased that we delivered a third consecutive quarter of adjusted gross margin expansion with improved execution in our supply chain. We drove strong adjusted EBIT and EPS performance across the company. Given an improved margin outlook for the year, we raised guidance for adjusted EBIT and EPS, while we lowered sales guidance to reflect increased currency headwinds.”

Peers’ margin estimates

CPB’s competitors in the industry are Mondelez International (MDLZ), Kraft Heinz (KHC), and General Mills (GIS). The gross margins for these companies for their upcoming quarters are expected to be as follows:

  • MDLZ is estimated to report 39.4% for fiscal 1Q16.
  • KHC is estimated to report 34.6% for fiscal 4Q15.
  • GIS is estimated to report 34.1% for fiscal 3Q16.

The Vanguard Consumer Staples ETF (VDC) invests a total of 8.7% in all these stocks.

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