Campbell Soup has another bad quarter; carrot problems return

Shares in Campbell Soup Co. fell sharply in early trading Tuesday, after the Camden company reported worse-than-expected results for the three months ended Oct. 29 and cut its earnings projection for the fiscal year ending next summer.

Campbell's stock closed down 8.2 percent, or $4.09, to $45.84 on the New York Stock Exchange. It was the stock's worst one-day percentage drop since October 2008, according to Bloomberg News.

The company blamed the first quarter's 14 percent decline in adjusted earnings before interest and taxes, as compared with last year's first quarter, largely on higher costs for carrots and other items, plus "escalating transportation and logistics costs following the hurricane season."

In September, Campbell warned that its failure to reach a deal on soup promotions with a major unidentified retailer would reduce company sales by 1 percent for the full fiscal year. In the first quarter, the impact was worse than expected because the customer also bought less soup for its inventory than expected.

"The dialogue with this key customer remains open, and I'm very optimistic that we'll reach a positive resolution," Denise Morrison, Campbell's president and chief executive, told analysts on the earnings call.

For the full year, Campbell now expects adjusted operating earnings to fall by 2 percent to 4 percent. The previous projection was that Campbell's operating earnings had a chance of increasing by 1 percent, with any decline expected to be no more than 1 percent. The difference amounts to about $45 million, said Campbell's chief financial officer, Anthony DiSilvestro.

The Bolthouse Farms fresh-carrot business continued to bedevil the company. "Unfavorable weather negatively impacted carrot crop root yields and led to supply constraints and higher-than-expected costs," Morrison said.

Campbell handled the problem better than it did last year when it had a similar problem, she noted. New management in the troubled unit "did not compromise the quality of carrots we delivered to customers," Morrison said. Instead, it proportionally reduced the amount of carrots it sent to each customer, a practice known as allocation.

The continued carrot problems prompted J.P. Morgan analyst Ken Goldman to ask how committed the Campbell board was to keeping that business.

"The carrot business, I think, has underperformed expectations," Goldman said. "It's unpredictable and, from an investor perspective, that leads to uncertainty which leads to lower multiples."

Multiples are a measure of how much a stock should be worth based on a given amount of earnings.

Despite the extremes of rain and heat that have affected the carrot crop in California, Morrison said, carrots form the backbone and scale for the distribution of refrigerated packaged goods, such as salad dressings, beverages, and salsa, that Campbell is counting on for growth.

"Carrots are the chassis for distribution at best pricing," she said.

Overall first-quarter sales at the company were $2.16 billion, down 1.9 percent from $2.2 billion a year ago. Adjusted operating earnings were $417 million, down $486 million.