Campbell Soup 1Q earnings down 3.7 percent

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MILWAUKEE (AP) -- Campbell Soup Co.'s higher soup sales were watered down by commodity hedging losses in its first fiscal quarter, as the soupmaker said Monday that profits fell 3.7 percent even as more cash-strapped consumers reached for its brands.

Shares of the Camden, N.J.-based company tumbled 8 percent as investors worried about the nation's largest soupmaker's ability to keep ahead of currency fluctuations and to translate a bigger thirst for soup into higher earnings.

The company lowered its outlook for the year on worries about currency translation, which affects companies with sizable portions of their business overseas as the U.S. dollar gains strength. Between 25 percent and 30 percent of Campbell's sales and earnings come from operations outside the U.S.

In the most recent quarter, commodity costs hampered margins, even as sales rose 3 percent to $2.25 billion from $2.19 billion last year.

The quarter included a $26 million unrealized loss on commodity hedges, and a 3.7 percent increase in advertising as Campbell's introduced new products and looked to gain market share from rivals like General Mills Inc.'s Progresso brand.

Sales of condensed soup, a category where Campbell is the market leader, rose 14 percent in the quarter. Analysts on a conference call Monday were confounded at the low profit margins even as soup sales grew.

"Clearly, everyone is disappointed with lack of profitability" given high sales in the high-margin condensed soup business, Terry Bivens of J.P. Morgan, told company officials.

Chief Executive and President Douglas R. Conant said the first quarter's results were in line with Campbell's expectations. He told analysts higher prices charged to consumers didn't offset commodity costs, adding that the quarter benefited only partially from price increases in September.

"We are still lapping just huge cost increases and our pricing is not fully reflected to capture those yet," Conant said.

Campbell's and other companies that make food have been hit by high prices for key ingredients like corn. Those prices have moderated from their record highs this summer, but they're still higher than normal. Not all companies have been able to offset the increases by increasing prices to consumers.

Conant said marketing was up "substantially" in the quarter as the company introduced new advertising for its condensed soups and new products like Swanson cooking stock. Campbell's said it spent $307 million on marketing and selling expenses in the quarter, up from $296 million last year.

Campbell's shares fell $2.85, or 7.9 percent, to $33.42 in afternoon trading Monday.

Edward Jones analyst Matt Arnold said in an interview that the stock was tumbling on the profit shortfall and worries about foreign exchange rates. He said the increased marketing helped explain some of the profit lag.

"It's a bit concerning," Arnold said. "But you just have to remember that there were a number of pretty big product launches. That costs money."

The appetite for soup seems to be growing, the company and analysts say, as consumers see it as an affordable meal choice.

Ready-to-serve soup sales increased 7 percent because of the launch of a line of healthy soups, which partially offset continuing declines for its Chunky soup brand.

Among non-soup items, the company said its Pepperidge Farm Goldfish crackers had sales gains but sales slipped for Pepperidge Farm cookies, which are considered more of a luxury good.

Of the 3 percent rise in sales, pricing and sales allowances contributed 7 percent in the quarter, while increased promotions hurt it by 2 percent. Among other factors, currency losses hurt sales by 1 percent. Volume and mix - the types of products people buy - helped it by 1 percent.

In the three months ending Nov. 2, the company said it earned $260 million, or 71 cents per share. That compares with $270 million, or 70 cents per share, a year earlier. The number of outstanding shares used to calculate earnings per share this quarter was lower because the company has bought back 3 million shares since June, using proceeds from the sale of its Godiva Chocolatier earlier this year. Fewer outstanding shares boost earnings per share figures.

Excluding one-time items, such as restructuring costs and losses on commodity hedges, the company would have earned $281 million, or 77 cents per share. That's one penny higher than the consensus expectation of 12 analysts surveyed by Thomson Reuters.

Stifel, Nicolaus & Co. analyst Christopher Growe wrote in a research note the company was off to a "solid start" for the soup season, typically the colder months.

He said Campbell's sales will be strong as more people eat at home and notice soup's "value proposition" he wrote, meaning it's a low-cost meal. But he warned of competitive threats from Progresso and private labels. Consumers are trading down to lower-cost store brands as a way to save money.

Conant said he didn't consider private label a threat, especially in condensed soup.

"We think we still have a great value offering and there's no evidence that private label has hurt us and hurt our growth," he said.

Associated Press Writer Geoff Mulvihill in Mount Laurel, N.J., contributed to this report.

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