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We are taking CPB off of the Hedgeye Consumer Staples SHORT Bench.

Campbell’s (CPB) held their Annual Investor Day yesterday afternoon, in which they went through their plan to reshape the company in search for growth.  If you didn’t get a chance to listen, I would say you did not miss anything that you could have just gotten from the press release. Nevertheless we will give you a quick summary and our take on the future for this company.

The biggest change the company is making is switching from a geography first mindset to a consumer category first mindset, and consolidating down to only three operating units:

  1. Their biggest, ‘Americas Simple Meals and Beverages’ will account for ~$4.6bn of net sales and will be the economic engine for the company. Management is projecting a long-term growth rate for this segment in the 1-2% range, in-line with category averages in which they play. This business has operating margins of 22% and will contribute 71% of operating earnings.
  2. ‘Global Biscuits and Snacks’ is a ~$2.7bn segment which globally unifies the Pepperidge Farm, Arnott’s and Kelsen businesses into a fully integrated biscuit and snack portfolio. This business has operating margins of 12% and will contribute 24% of operating earnings.
  3. ‘Campbell Fresh’ is a ~$1bn portfolio that includes their recently acquired Garden Fresh Gourmet business, Bolthouse Farms and Campbell’s retail refrigerated soups. This business has operating margins of 7% and will contribute 5% of operating earnings.

Cost reduction initiatives are also a big part of management’s plan, by 2018 they expect to have annual savings of $250 million by 2018, of which ~2/3 will be non-headcount expenses. Non-headcount savings are in large part a result of zero-based budgeting adoption and changing company spending policies. The other ~1/3 is headcount savings as a result of the organization redesign, in which the company eliminated layers and expanded control.

Innovation and product improvement is top of mind for management, but in low impact areas. CPB has set up a new website, www.whatsinmyfood.com to be more transparent with consumers. Soup has a lot of negative ingredients such as MSG that prior to looking at this website I didn’t realize were in the soup. We think it may have been a better idea to take the MSG out before making the website, but that’s just our opinion. That being said, CPB is committed to taking the MSG out and making the recipes simpler.  In August, Campbell’s will be launching the first updated range of kids soups, this happens to be the same time that Annie’s (GIS) will be launching their line of kids soups. Although soup is not our favorite category, this will be an interesting battle to watch unfold, depending on price points we think Annie’s will have the upper hand. CPB has a slew of other product improvements that every other company is doing, such as taking out artificial colors and flavors and high-fructose corn syrup but nothing to truly differentiate the brands from the competition, just doing enough to stay in the game.  

Outlook for FY2015 is largely a cost cutting/margin expansion story. Sales are expected to be down -1%, while versus previous estimates for EPS to be down -5% to -3% the updated numbers are projecting -1% to 0%.

Overall we believe this reorganization for the company was a great move and will help them expand their brands globally. But this ship is anchored to the floor by soup. Their on-trend growth engine, ‘Campbell Fresh’ where they are doing a majority of the innovation is too small to matter in the grand scheme. Yes, we believe it is a great business and segment to operate in, but as part of this company it won’t be enough.

It’s tough to go short on this name (only 6.6% of the float is short) given the constant threat of possibly being acquired especially with KHC probably in the market for another synergistic acquisition in the next year (the can manufacturing synergies alone would probably be enough to make the deal work.) We remain bearish on the name fundamentally, and can’t get ourselves to go long just hoping for an acquisition.

This was a brief summary and we would be happy to talk with you more about what we thought over the phone, please send us an email if interested.