Executive Summary / Key Takeaways

• Campbell Soup Company is undergoing a strategic transformation, leveraging its deep history and brand equity while integrating the high-growth Sovos Brands acquisition to reshape its portfolio and drive future value.
• Recent financial performance reflects this duality: strong growth and profitability in the Meals & Beverages segment, significantly boosted by Sovos/Rao's, contrasted with challenges and competitive pressures in the Snacks segment impacting overall results and outlook.
• Aggressive cost savings initiatives, supply chain optimization, and digital transformation efforts are underway, targeting significant future savings and operational efficiencies to fuel brand investment and margin expansion, particularly in the Snacks division.
• Fiscal 2025 guidance anticipates modest organic sales growth and earnings growth, with adjusted EPS expected at the low end of the range due to slower Snacks recovery, while acknowledging potential tariff headwinds and the benefit of a 53rd week.
• Key factors for investors to monitor include the pace of the Snacks segment recovery, the continued integration and growth trajectory of Rao's, the realization of cost savings targets, and the impact of macroeconomic pressures and competitive dynamics.

A Legacy Transformed: Setting the Scene

For 155 years, The Campbell's Company has been a staple in kitchens, built on a foundation of iconic brands and a rich history tracing back to the invention of condensed soup by Dr. John T. Dorrance. This legacy, shaped by generations of leadership and strategic evolution, continues today as the company navigates a dynamic consumer and competitive landscape. Operating primarily through two core segments – Meals & Beverages and Snacks – Campbell's holds significant market positions, often ranking #1 or #2 in its respective categories.

The company's recent history is marked by deliberate portfolio transformation. Following years of cost optimization initiatives and the integration of acquisitions like Snyders-Lance, Campbell's embarked on a new chapter with the $2.90 billion acquisition of Sovos Brands in March 2024. This move, bringing high-growth brands like Rao's into the fold, signaled a strategic pivot towards premium segments and accelerated growth opportunities. Concurrently, the company has refined its focus through divestitures, including the Pop Secret popcorn business and the noosa yoghurt business, aiming to concentrate resources on its most differentiated leadership brands for enhanced profitability and sustainable growth.

In the competitive arena, Campbell's faces formidable rivals across its segments, including large, diversified players like General Mills (GIS), PepsiCo (PEP), Conagra Brands (CAG), and Kellanova (K), as well as smaller, agile entrants and the growing influence of private label offerings. Competition manifests across pricing, promotion, innovation, and distribution. Campbell's leverages its deep-rooted brand equity and extensive distribution networks, particularly the direct-store-delivery model in Snacks, to maintain its standing. However, it must continuously adapt its strategy and execution to counter competitive pressures and evolving consumer preferences.

Operational Excellence and the Digital Thread

Underpinning Campbell's strategic transformation is a focus on operational excellence and the integration of technology to drive efficiency and capability. The company has a history of multi-year cost savings initiatives, culminating in approximately $950 million in pre-tax savings by July 2024. Building on this, a new program initiated in Fiscal 2025 targets approximately $210 million in pre-tax costs through 2028 to achieve an estimated $250 million in annual ongoing savings by the end of 2028. These initiatives span supply chain and manufacturing network optimization, IT infrastructure enhancements, and targeted cost management.

A key operational and technological undertaking is the integration of the Sovos Brands business onto Campbell's existing SAP enterprise-resource planning (ERP) system, completed as of the beginning of Q4 Fiscal 2025. This transition is expected to unlock additional back-office savings in IT, finance, and order management into Fiscal 2026. Furthermore, the company is investing approximately $215 million in capital expenditures tied to the 2025 cost savings initiatives, primarily focused on optimizing production within its manufacturing network and enhancing IT infrastructure.

Beyond core systems, Campbell's is accelerating its digital transformation strategy with the hiring of a Chief Digital and Technology Officer. This role is tasked with leveraging innovative technologies to enhance agility, strengthen capabilities, and accelerate growth across the organization. While specific quantifiable benefits of these digital initiatives are not detailed, the strategic intent is clear: to improve efficiency and effectiveness in a dynamic market.

In the Snacks segment, a specific operational initiative is underway to improve the direct-store-delivery (DSD) route-to-market network. This involves purchasing, combining, and selling certain routes to independent contractors to unlock greater scale. Expected to incur expenses up to approximately $115 million through 2029, this program aims to optimize distribution effectiveness.

The "so what" for investors is that these operational and technological efforts are critical enablers of Campbell's strategy. They are designed to generate the necessary fuel – through cost savings and efficiency gains – to reinvest in brand building, innovation, and market support, ultimately aiming to improve profitability and support long-term growth objectives, particularly in the competitive Snacks segment where margin expansion is a key focus.

Competitive Arena: Strengths, Challenges, and Strategic Positioning

Campbell's operates within a highly competitive packaged food landscape, facing off against a mix of large, diversified peers and niche players. Its competitive standing is a blend of enduring strengths and areas requiring strategic focus.

In the Meals & Beverages segment, Campbell's holds a strong position, particularly in soup and Italian sauces. The acquisition of Sovos Brands significantly bolstered its presence in the premium Italian sauce category with Rao's. While competitors like Conagra offer value-focused meal solutions, Campbell's differentiates with its iconic Campbell's soup brand, the complementary positioning of Prego (mainstream) and Rao's (premium) in sauces, and the strength of brands like Swanson and Pacific in broth. The company's ability to leverage its supply chain to meet demand, even when competitors face constraints (as seen with private label broth), provides a tangible advantage. The strategic decision to position Rao's as a premium offering competing not just with other sauces but also with mainstream Italian takeout highlights a unique value proposition that resonates across income levels, including millennials, where Rao's is seeing disproportionate growth.

The Snacks segment presents a more challenging competitive environment. Here, Campbell's faces intense pressure from giants like PepsiCo with its Frito-Lay portfolio and Kellanova with brands like Pringles and Cheez-It, as well as numerous smaller players and private label options. While Campbell's holds leading positions with brands like Goldfish, Snyder's of Hanover, and Pepperidge Farm, it has experienced market share headwinds. This pressure stems from a combination of factors: increased competitive promotional activity, new entrants in elevated subsegments (like Kettle and Late July's space), and trade-down to private label in certain categories like cookies and pretzels.

Quantitatively, comparing Campbell's to peers based on available TTM data reveals a mixed picture. Campbell's TTM Gross Profit Margin of 30.21% is comparable to GIS (35%) and K (36%), but trails PEP (55%) and is ahead of CAG (28%). TTM Net Profit Margin at 4.44% is significantly lower than GIS (13%), PEP (10%), and K (11%), and even trails CAG (3%). This suggests that while Campbell's manages its cost of goods sold reasonably well relative to some peers, higher operating expenses or interest costs are impacting its bottom line profitability compared to more efficient or higher-margin competitors. The high Debt/Equity ratio (not available as a specific TTM figure, but noted as 3.0x net debt to adjusted EBITDA in Q3 FY25 following the acquisition financing) also impacts net income via interest expense, a factor seen across peers like PEP and CAG, but potentially more pronounced for CPB post-Sovos.

Campbell's is responding to the Snacks segment challenges by focusing on innovation, strategic brand support, and price-pack architecture. The goal is not a "race to the bottom" on pricing, but rather ensuring competitive price points, allocating promotional activity effectively, and emphasizing value through different pack sizes. The company's strength in specific niches, like Pepperidge Farm's premium cookies and bakery or Snack Factory's reimagined pretzels, provides avenues for differentiation. However, the slower-than-anticipated recovery and competitive intensity in Snacks remain a key vulnerability impacting overall performance.

Financial Performance: A Tale of Two Segments

Recent financial results underscore the divergent performance of Campbell's two core segments. For the third quarter of Fiscal 2025, net sales increased 4% year-over-year to $2.48 billion. This growth was primarily driven by the significant contribution from the Sovos Brands acquisition and favorable volume/mix, partially offset by the impact of recent divestitures and lower net price realization. Year-to-date Fiscal 2025 (nine months ended April 27, 2025), net sales grew 8% to $7.93 billion, also largely fueled by the acquisition.

Profitability metrics show pressure. The gross profit margin decreased by 150 basis points in Q3 FY25 to 29.4% and by 90 basis points year-to-date to 30.4%. This decline was primarily attributed to cost inflation, other supply chain costs, unfavorable net price realization, and mark-to-market adjustments on commodity hedges, partially mitigated by productivity gains and favorable volume/mix.

Adjusted EBIT increased modestly by 2% in Q3 FY25 and 2% year-to-date. This growth was supported by higher gross profit (year-to-date) and lower administrative expenses (Q3), but was partially offset by higher marketing and selling expenses and significantly higher interest expense due to increased debt levels post-acquisition. Net earnings attributable to Campbell's decreased to $66 million ($0.22 per share) in Q3 FY25 from $133 million ($0.44 per share) in the prior year, and to $457 million ($1.52 per share) year-to-date from $570 million ($1.91 per share). These declines were heavily influenced by items impacting comparability, including significant impairment charges ($150 million on Snyder's of Hanover trademark in Q3, $176 million year-to-date including Allied brands and Late July trademarks), costs associated with divestitures, and litigation expenses, alongside the operational performance.

Segment performance highlights the contrast:

• Meals & Beverages: Net sales increased 15% in Q3 FY25 and 19% year-to-date, primarily due to the Sovos acquisition. Operating earnings grew 8% in Q3 and 15% year-to-date, also driven by the acquisition benefit. Organic net sales growth in Q3 was 6%, fueled by favorable volume/mix and shipment timing, with strong in-market performance in soup and Italian sauces benefiting from at-home cooking trends.
• Snacks: Net sales decreased 8% in Q3 FY25 and 6% year-to-date. Operating earnings decreased 13% in Q3 and 18% year-to-date, primarily due to lower gross profit and higher marketing/selling expenses. Organic net sales declined 5% in Q3, driven by lower volume/mix and lower net price realization, impacted by planned reductions in partner/contract brands and competitive pressures.

Liquidity remains adequate. The company generated $872 million in operating cash flow year-to-date FY25. It ended Q3 FY25 with $143 million in cash and equivalents and $1.85 billion available under its revolving credit facility. Debt management is a focus, with the net debt to adjusted EBITDA leverage ratio improving slightly to 3.0x at the end of Q3 FY25, with a stated goal to return to 3.0x net leverage. The company has actively managed its debt profile, including issuing $1.15 billion in notes in October 2024 to refinance maturities. Capital expenditures year-to-date were $296 million, with a full-year expectation of approximately $450 million, supporting growth and optimization initiatives.

Outlook and Guidance: Balancing Growth and Recovery

Campbell's outlook for Fiscal 2025 reflects a cautious yet determined approach, balancing the expected contributions from strategic initiatives and the Sovos acquisition against the ongoing challenges in the consumer and competitive environment, particularly within the Snacks segment.

The company has reaffirmed its full-year Fiscal 2025 guidance ranges (excluding tariff impacts), but now expects adjusted earnings to be at the low end of the previously provided range. This adjustment is directly attributed to the slower-than-anticipated recovery in the Snacks business.

Key components of the Fiscal 2025 outlook include:

• Reported Net Sales: Expected to increase approximately 6% to 8% (updated in Q2 FY25, reflecting the noosa divestiture impact).
• Organic Net Sales: Expected in a range of down 2% to flat (updated in Q2 FY25), reflecting a more muted volume-mix contribution in the second half, particularly in Snacks.
• Adjusted EBIT: Expected to grow 3% to 5% (updated in Q2 FY25), inclusive of the noosa divestiture impact.
• Adjusted EPS: Expected in a range of $2.95 to $3.05 (updated in Q2 FY25, reaffirmed Q3 FY25), inclusive of the noosa divestiture impact, with adjusted earnings now expected at the low end of this range.

Management anticipates core inflation for the full year to remain in the low single-digit range, which is expected to be mitigated by productivity improvements and increased cost savings. The cost savings expectation for the full year has been raised from $120 million to $130 million.

The guidance incorporates the benefit of a 53rd week in Fiscal 2025, estimated to contribute approximately two points of growth to reported net sales and adjusted EBIT, and approximately $0.05 to adjusted EPS. It also acknowledges an estimated net incremental headwind of tariff-related costs of up to $0.03 to $0.05 per share, which is not included in the guidance due to the uncertain trade environment.

Phasing of performance is expected to show sequential improvement. Snacks margins are anticipated to improve sequentially throughout Q3 and Q4 compared to Q2 levels, though the full-year Snacks margin is expected around 13% (as per Q2 commentary). Organic net sales growth is expected to sequentially improve from Q2, potentially turning positive in the fourth quarter (excluding the 53rd week). Second half adjusted EPS is expected to be more equally distributed than historical patterns, excluding the 53rd week.

Capital expenditures for Fiscal 2025 are expected to be approximately 4.5% of net sales, supporting strategic initiatives and growth capacity. Adjusted net interest expense is projected between $325 million and $330 million (updated in Q2 FY25), reflecting the benefit of divestiture proceeds used for debt reduction.

Overall, the outlook signals a period of continued execution against strategic priorities, with a focus on driving efficiency and investing in brands to navigate the challenging market and position the company for a stronger Fiscal 2026 recovery, particularly in the Snacks segment.

Risks and Challenges

Despite strategic progress and strengths in certain segments, Campbell's faces several risks and challenges that could impact its performance and the investment thesis.

Macroeconomic pressures, including persistent inflation, potential impacts of tariffs, and economic uncertainties, continue to influence consumer purchasing and spending patterns. This has led to increased consumer sensitivity and a shift towards value and at-home cooking, benefiting Meals & Beverages but creating headwinds for discretionary Snacks categories. The estimated $0.03 to $0.05 per share impact from tariffs, while not in guidance, represents a tangible potential headwind.

The competitive environment remains intense across all categories. Increased promotional activity and the emergence of new entrants in key Snacks subsegments pose a threat to market share and require sustained investment in innovation, marketing, and promotional activity, potentially impacting margins. The expected recovery of private label supply in the broth category is anticipated to result in share pressure for Campbell's Swanson brand in the second half of Fiscal 2025.

Operational risks include potential disruptions in the supply chain, commodity cost volatility, and labor market issues. While the company uses hedging strategies and works with suppliers, these factors can still impact costs and margins.

The successful integration of the Sovos Brands acquisition and the realization of anticipated synergies are critical. While integration is progressing well and Rao's performance has been strong, failure to fully integrate operations or sustain the growth momentum of acquired brands could impact future results.

Valuation of long-lived assets, particularly goodwill and intangible assets, involves significant management judgment and assumptions about future performance and market conditions. Impairment charges, such as the $150 million charge on the Snyder's of Hanover trademark in Q3 FY25, highlight the sensitivity of these valuations to changes in business conditions and outlook.

Litigation and regulatory matters, including environmental proceedings and those related to past divestitures, present potential liabilities and costs, although currently not expected to have a material adverse effect on financial condition.

The slower-than-anticipated recovery in the Snacks segment is a significant near-term challenge, directly impacting the full-year earnings outlook. The company's ability to stabilize and reignite growth in this key division will be crucial for achieving its strategic objectives and improving overall performance.

Conclusion

Campbell Soup Company is in a period of strategic transformation, leveraging its deep heritage and iconic brands while actively reshaping its portfolio through acquisitions and divestitures. The integration of Sovos Brands, particularly the strong performance of Rao's, provides a significant growth engine and premium positioning in the Meals & Beverages segment, which is currently benefiting from consumer trends favoring at-home cooking. However, the company faces notable headwinds in its Snacks segment, grappling with competitive intensity, changing consumer spending habits, and a slower-than-expected category recovery, which is impacting overall financial performance and near-term outlook.

Management's focus on aggressive cost savings, supply chain optimization, and digital capabilities is designed to build a more efficient foundation and generate resources for reinvestment in brand building and innovation, particularly critical for reigniting growth and expanding margins in the Snacks division. While the Fiscal 2025 guidance reflects a pragmatic view, anticipating a slower Snacks recovery and potential tariff impacts, it also points to sequential improvement throughout the year and the benefits of strategic initiatives taking hold. For investors, the story of Campbell's hinges on the successful execution of its integration and cost savings plans, the sustained growth trajectory of its premium brands like Rao's, and the company's ability to navigate the competitive landscape and drive a meaningful recovery in its Snacks portfolio amidst a challenging consumer environment. The path forward requires disciplined execution and adaptability to realize the full potential of its transformed portfolio.