The food and beverage industry is witnessing some notable trends that are impacting business strategies. Campbell Soup Co. is making efforts to position itself for margin expansion in the upcoming fiscal year. The company is anticipating a slowdown in core inflation to the low single-digit range, which will lead to cost savings and productivity gains. CFO Carrie Anderson stated that net pricing increased by 13% over the past year, bringing the inflation rate down from a peak of 18% in the beginning of 2023. This moderation in inflation is expected to enable incremental cost savings and drive margin expansion.
President and CEO Mark Clouse shared insights on the outlook and results with analysts and mentioned that while cost inflation will be front-loaded, it is expected to improve throughout the year. Clouse expressed confidence that despite a challenging Q1, gross margins will not face significant headwinds. In the 2023 financial year, Campbell’s adjusted gross margin slightly decreased from 31.4% to 31.1%. However, Clouse noted that further pricing adjustments may be considered due to the spill-over effects of inflation and their impact on consumer purchasing behavior. The company expects a sequential volume improvement in the second half of the year, leading to positive trends.
Volume recovery
Despite the challenging market conditions, Campbell aims to drive volume recovery in its business divisions. Last year, the group witnessed a 4% decline in volume/mix, with meals and beverages division experiencing a 5% decline and snacks division facing a 2% drop. Clouse acknowledged that there has been a slowdown in volume recovery compared to initial expectations. However, he believes that as the market returns to a more normal environment, volume improvement will be a catalyst for overall growth throughout the year. Clouse also highlighted the impact of seasonality on consumer purchases, specifically mentioning the reduced demand for soup during summer compared to autumn and winter. He expects a “bifurcation between seasonal categories.”
Clouse further emphasized that certain food categories such as pasta, rice, and pasta sauce have performed well due to their suitability for feeding more family members. However, some single-serve and individual products have been more affected by consumer tightening. As inflation moderates, Clouse anticipates a return to normal across the fiscal year, with the summer season likely to exert pressure on volumes in the first part of Q1.
Division margins
Campbell is gearing up for accelerated growth and margin improvement in its snacks division and a sequential and steady improvement in the meals and beverages division throughout the year. The company expects snacks to achieve an operating margin above 15%, while meals and beverages are anticipated to experience modest operating margin expansion in the second half of the year. The acquisition of the Sovos Brands Italian sauces and meals business, scheduled for completion by the end of December, is expected to aid the margin expansion in meals and beverages. In the previous year, snacks saw a 130 basis points improvement in operating margin to reach 14.4%, while meals and beverages witnessed a decrease to 18.2% from 19%.
Campbell forecasts a range of down 0.5% to up 1.5% for reported net sales in 2024, with organic growth expected to be flat to a positive 2% as the pricing influence diminishes. The company also projects 3-5% growth in adjusted EBIT and earnings per share, with an adjusted EPS print of $3.09-3.15. In the 2023 fiscal year, Campbell reported net sales of $9.4bn (9% reported, 10% organic) and a 5% growth in adjusted EBIT to $1.4bn. Adjusted EPS stood at $3.00, reflecting a 5% increase.
