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Campbell Soup Co. (NYSE:CPB) reported fiscal 2011 second-quarter adjusted earnings of 71 cents per share, in line with the Zacks Consensus Estimate. However, quarterly earnings fell short of the year-ago results of 74 cents per share.

Campbell’s net sales during the quarter declined by 1.0% year over year to $2,127 million, also missing the Zacks Consensus Estimate of $2,150 million. The decline was primarily caused by a 2% spike in promotional spending, partially offset by favorable currency translations of 1%.

Segment Analysis

Sales at the U.S. Soup, Sauces and Beverages division fell 4% year over year as sales of condensed, ready-to-serve soups and beverage sales declined 7%, 4% and 1%, respectively. However, the decrease in segment sales was partially countered by a 7% growth in broth.

Campbell’s Baking and Snacking segment posted a growth of 8% year over year, mainly due to favorable currency translations, increased volume and pricing, partially offset by currency fluctuation. The company witnessed higher sales of cookies and crackers, and a good performance at Pepperidge Farm. Sales in Australia increased due to a favorable currency impact and growth at Arnott’s.

The International Soups and Sauces segment also recorded a 4% sales decline, mainly due to lower sales in Europe and Latin America. However, the reduction in segment sales was partially offset by improved sales in Asia-Pacific and Canada along with volume gains.

North America Foodservice division’s quarterly sales slipped 1% year over year. The decline was primarily attributable to sluggish volumes and increased promotions, partially offset by favorable foreign exchange rates and pricing.

Operating Metrics

During the quarter, Campbell’s gross margin contracted 110 basis points (bps) to 39.4% from 40.5% in the year-ago period, primarily due to higher promotional spending and cost inflation, partially offset by productivity improvements. Operating income decreased 8% to $359 million also due to increased promotional spending.

Financials

Campbell ended the quarter with cash and cash equivalents of $325 million. Quarter-end long-term debt was $1.94 billion. Year to date, the company generated $483 million of cash from operations. The company bought back 16 million shares for a total cost of $573 million.

Guidance

Looking ahead, Campbell expects sales to decline-to-increase in a (1%) to 1% band in fiscal 2011. The company forecasts adjusted earnings for the fiscal to decline at a clip of 1% to 3%.

Campbell's Soup is one of the world's leading manufacturers of convenience food products. The company’s diversified portfolio of well-established brands, including Campbell’s, Erasco, Liebig, Pepperidge Farm, V8, Pace, Prego, Swanson, and Arnott’s, offer a competitive edge, strengthening its well-established position in the market.

However, Campbell's Soup operates in the highly competitive food industry and experiences worldwide competition in all of its principal products from such well-established rivals such as General Mills Inc. (NYSE:GIS), HJ Heinz Co. (NYSE:HNZ) and Del Monte Foods Co. (DLM). Consequently, the company is under severe stress to maintain its operating performance.

We currently have a short-term Zacks #3 Rank (Hold) rating and a long-term Neutral recommendation on the company.

Source: A Lukewarm 2Q at Campbell's

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