The Campbell's Co

Campbell's fourth-quarter organic sales fell 1% on lower volumes. Adjusted operating margin sank 250 basis points to 11.3%, as a 530-basis-point hit from inflation offset a 380-basis-point benefit from cost savings. The firm cut its dividend by more than 30%, sending shares down around 7%.

Why it matters: Campbell's has fallen victim to a challenging macro and competitive environment, pressure is particularly acute in snacks (organic sales down 6%), where the firm lacks the scale and negotiating heft of larger rivals like wide-moat PepsiCo. Still, investments in innovation and marketing seem to be gaining traction. The core Goldfish line returned to growth (up 1.6%), aided by its Pokémon collaboration, and Rao's consumption rose 8.9%, driven by new offerings such as its Creamy red sauce line. However, more work remains. We don't expect Campbell's to siphon spending in its brands and capabilities to boost profitability and cash flow. Rather, we expect investments in research, development, and marketing to average 5% of sales over the next decade, near historic levels and generally consistent with peers.

The bottom line: We've reduced our fair value estimate for wide-moat Campbell's to $41.50 per share from $56.00, reflecting a sour fiscal 2027 outlook (organic sales down 2%-4%, adjusted EBIT down 7%-12%), an elongated path to low-single-digit sales growth and midteens operating margins, and a higher weighted average cost of capital. Even after accounting for the rout in shares and our revised valuation, the stock still trades at a 50% discount. We think the market fails to appreciate its ability to unlock cost savings (slated to approach a further $500 million by fiscal 2030) to fuel continued investments in its brands. While an abrupt shift from past rhetoric, the decision to slice its dividend frees up $170 million annually to be used for debt reduction as it works toward 3 times leverage; we think it can achieve these marks by fiscal 2030.

Campbell's pursuit of profitable sales growth is admittedly taking longer than management, or we, anticipated. But we don't think this undermines the prudence of its course. Rather, we see actions to enhance its procurement processes and optimize its manufacturing and supply chain networks as sound amid unrelenting inflation (slated to increase 5%-6% for raw materials and packaging and double digits for logistics in fiscal 2027) and intense competition. Beyond extracting inefficiencies, we think the firm will surgically raise prices (up 4%-5% across 60% of its mix) and adjust price packs to dull the hit to margins, while investing to keep its fare affordable for cost-conscious consumers. Further, we think actions to embed consumer insights more effectively into product development should improve its share position across the categories in which it plays. Taken together, this underpins our outlook for 2% average annual sales growth and operating margins that approach 17% by fiscal 2036.

We’re lowering our fair value estimate for Campbell's to $41.50 per share from $56. The firm issued a pessimistic outlook for fiscal 2027, with organic net sales down 2%-4% and adjusted operating income down 7%-12%, indicating an elongated horizon to return to profitable sales growth. Our revised outlook also incorporates a higher discount rate, with our weighted average cost of capital at 7.2%, up from 6.8%. Despite economic uncertainty, we expect Campbell's to remain disciplined in its approach to promotions and extracting inefficiencies, a portion of which we think it will prudently redeploy to buoy brand investments and support the business' long-term health. As such, we maintain our long-term forecast for low-single-digit annual sales growth and operating margins that approach the high teens over the next decade (2027-36). Our valuation implies a fiscal 2027 enterprise value/EBITDA of 13 times.

From a top-line perspective, we posit Campbell's should ultimately be able to leverage its combination with Snyder's-Lance, since snacking is a business Campbell's knows well (particularly with its Pepperidge Farms and Goldfish brands), despite recent challenges. We see this as a promising opportunity given consumers’ penchant for convenient, healthy fare. Similarly, we maintain a favorable view of the Sovos Brands acquisition (a business that generates around $1 billion in annual sales), as we believe the deal will strengthen Campbell’s exposure to the faster-growing, more premium segments of the Italian sauces aisle, complementing its lower-priced sauce brand, Prego. These factors underpin our belief that Campbell’s recipe for spicing up its product innovation and marketing support (particularly in its core soup niche, which had been starved of investment under former CEO Denise Morrison) should enable it to chalk up about 2% and 3% annual segment top-line gains, respectively, in its meals and beverages and snack operations over the long term.

Regarding profitability, we believe the firm's aim to extract another $500 million in costs through fiscal 2030 (or an incremental $350 million when accounting for previously announced overhead cost-cuts) is prudent. These savings are on top of the $950 million extracted in the past few years, as it works to enhance its procurement practices, reduce its workforce, and optimize its manufacturing and supply chain networks. Over the long term, we expect Campbell's to direct a portion of these savings to its brands to support its competitive edge. We forecast that marketing will account for around 4% of sales over the next 10 years, while research and development will be approximately 1% of sales, roughly in line with historical levels. This results in operating margins that approach 17% by the end of our 10-year explicit forecast (generally in line with the average between 2013 and 2022).

We assign Campbell's a wide Morningstar Economic Moat Rating. We believe the firm has built a durable competitive advantage through its strong brands and entrenched retailer relationships, which create some cost advantages. Taken together, we posit that this has created meaningful barriers to successful entry into the categories in which it operates. We forecast adjusted returns on invested capital (including goodwill) will reach nearly 11% by the end of our 10-year explicit forecast (exceeding our 7.2% weighted average cost of capital) and believe the firm will generate excess economic profits over the next two decades.

To start, Campbell's holds category leadership in US shelf-stable soup (around one-quarter of sales), commanding 61% of the market compared with the high-teens and low-teens respective shares held by narrow-moat General Mills and lower-priced private label, according to Euromonitor. While growth will likely remain muted in this mature, domestic category, returns on invested capital are poised to still exceed our cost of capital estimate even if category (and ultimately Campbell's) sales languish more than we anticipate in our base case. Beyond its namesake, Campbell's also ranks among the top three in several adjacent categories, including sauces, broth, and shelf-stable ready meals, making the firm a valued partner for retailers seeking to stock leading brands.

Although Campbell's doesn’t dominate the snacking aisle (nearly 40% of sales), we still believe this slice of its mix has built a moat through strong brand intangibles. Specifically, Campbell’s legacy business comprises strong brands such as Pepperidge Farm and Goldfish, which hold a 4% share in the domestic sweet biscuits and around 15% in savory biscuits, respectively. Beyond this, we believe the addition of Snyder’s-Lance (2018) strengthened the firm’s position in the fast-growing snack category and elevated its retailer relationships, given the target’s broader reach in snacks (through Snyder’s of Hanover, Kettle Brand, and Cape Cod, among others) and presence in better-for-you snacking. As a result, the share of brands under Campbell’s umbrella (21%, up from 15% in 2017) now approach wide-moat Mondelez (35%) and Mars (27%) in US savory biscuits. Further, Campbell's leads in pretzels (29%), outpacing its wide-moat peers Hershey (20%) and PepsiCo (7%).

In our view, Campbell’s enduring foothold across multiple categories stems from investments in its brands, directing roughly 5% of sales annually (around $450 million) to research, development, and marketing on average over the past five years. In this context, Campbell's has shown a commitment to bringing consumer-valued innovation to shelves (leveraging troves of data and analytics) through new texture and flavor profiles and alternative pack sizes, which helps expand its reach in untapped channels and occasions. But Campbell's doesn’t let its fare flounder; instead, it spends on marketing to keep its products top of mind. Importantly, this spending is broad-based across its mix. A few years back, after disposing of its fresh offerings and its international business (which we saw as noncore), Campbell's stepped up investments in its core meals and beverages segment (with a target of increasing its marketing spending by 1%-2% of sales between fiscal 2019 and fiscal 2022), abandoning its previous path to use this unit as a cash cow to support its faster-growing snacks arm. We believe the fruits of these efforts have manifest in the firm’s 540 basis points of market share gains (to 61%) in the shelf-stable soup category between 2016 and 2025, which we perceive as particularly impressive given its mature positioning on its home turf. We don’t think it intends to veer from this course, as we forecast the firm will continue to direct 5% of sales toward research, development, and marketing annually to support its leading market positions in the longer term.

To complement the strength of its brand intangible assets, we anticipate Campbell's will selectively pursue opportunities to strengthen its portfolio by adding niche brands to unlock fresh consumer insights and growth potential. For instance, Campbell’s acquisition of Sovos Brands (which closed in March 2024) enables its foray into the premium enclaves of the Italian sauces aisle through Rao’s Homemade, which we believe will not only complement its affordable sauce brand Prego but also drive distribution gains, further bolstering its standing with retailers.

As a byproduct of its brand intangible assets, we believe Campbell's realizes some cost benefits. With a broad domestic manufacturing and distribution network, we contend Campbell's operates with lower unit and distribution costs and greater supply chain efficiency than smaller peers. This is a critical advantage for Campbell's, as it provides reliable access to inputs that others may be unable to secure. It allows the firm to fulfill orders promptly, making it a reliable vendor for retailers wary of costly out-of-stocks. Moreover, we believe Campbell’s cost advantage enables the firm to replicate competitive products and ultimately offer them at a lower price. This creates barriers to entry for smaller operators, which likely have limited financial flexibility and face higher customer acquisition costs and slotting fees. As quantitative evidence, we examine the direct operating margin, a metric we derive by removing discretionary operating costs (such as advertising and R&D), noncash costs (including depreciation and amortization), and nonrecurring expenses to assess manufacturing and distribution costs. Campbell’s five-year median direct operating margin has hovered around 21%, roughly in line with the 24% median for packaged food firms in our coverage universe.

Removing excess costs should afford Campbell's the ability to reinvest in its brands, about a dozen of which, generate more than $100 million in sales each year.

Leveraging technology, data insights, and artificial intelligence should help Campbell's bring consumer-valued new products to the shelf in a timely manner and attract new consumers to its vast product mix.

We posit Rao's premium positioning should help Campbell's win with consumers who are trading up amid more at-home dining (as the brand's consumption growth has consistently approximated a high-single-digit level).

Another step-up in labor, logistics, packaging, and raw material costs (which could be exacerbated by tariffs and the conflict in the Middle East) may dent Campbell's ability to drive meaningful margin gains.

In our view, the additional costs of improving the health profile of its mix (and, as such, removing artificial flavors and coloring) may result in margin erosion.

Campbell's volumes could be stymied if it raises prices while lower-priced private-label fare and other national brands increase promotions.