Executive Summary / Key Takeaways

• Campbell's operates a two-speed portfolio where Meals & Beverages thrives on at-home cooking trends and Rao's premium growth, while Snacks faces category softness and competitive pressure, creating a fundamental drag on consolidated performance.
• Tariffs represent the dominant near-term risk, with management attributing two-thirds of fiscal 2026's expected 12-18% adjusted EPS decline directly to net tariff impacts, primarily Section 232 steel and aluminum duties on food-grade cans that lack domestic alternatives.
• The company's cost discipline remains formidable, having delivered $950 million in pre-tax savings from prior initiatives and now targeting $375 million annually by 2028 through its PEEK program, though these savings cannot fully offset tariff headwinds and snacks margin compression.
• Valuation at $29.91 per share appears reasonable with a 14.9x P/E, 8.5x EV/EBITDA, and 5.2% dividend yield, but the investment case hinges on successful snacks stabilization in the second half of fiscal 2026 and effective mitigation of what management estimates as 4% of cost of goods sold in gross tariff exposure.
• The bull case rests on Rao's trajectory toward becoming a billion-dollar brand and sustained meals momentum, while the bear case centers on prolonged snacks weakness, incomplete tariff pass-through, and the risk that cost inflation overwhelms productivity gains in fiscal 2026.

Setting the Scene: A Transformed Food Giant at a Crossroads

Campbell's Company traces its heritage to 1869, formally incorporating under New Jersey law in 1922, and has spent the past decade executing one of the most deliberate portfolio transformations in packaged foods. Headquartered in Camden, New Jersey, the company abandoned its century-old name in November 2024 to reflect a portfolio that extends far beyond soup, now spanning premium pasta sauces, snacking brands, and frozen meals. This identity shift signals management's conviction that the business has evolved, but the market has yet to fully digest what this means for earnings power and risk profile.

The company makes money through two distinct segments. Meals & Beverages generates $6.05 billion in annual sales from iconic brands like Campbell's soup, Swanson broth, Prego sauces, and the recently acquired Rao's portfolio. This division benefits from consumer trends toward home cooking and premium ingredients. Snacks contributes $4.20 billion from Pepperidge Farm, Snyder's of Hanover, Lance crackers, and Kettle Brand chips, competing in categories facing private label encroachment and shifting consumption patterns. The strategic rationale for this dual-segment structure was to create a balanced portfolio leveraging shared manufacturing and distribution, but fiscal 2025 revealed a widening performance gap that challenges this logic.

Campbell's operates in a hyper-competitive industry where scale determines bargaining power with retailers and suppliers. The company holds a dominant qualitative position in U.S. condensed soups, with an estimated 50-60% market share, but ranks as a mid-tier player in the broader $100 billion U.S. packaged foods landscape. This positioning creates inherent tension: Campbell's possesses pricing power in soup and broth but lacks the scale of General Mills (GIS) or Kraft Heinz (KHC) to absorb input cost volatility or match their promotional spending. The company's four-pillar strategy—Top Team, Best Portfolio, Winning Execution, Lasting Impact—aims to bridge this gap through brand investment and cost leadership, but execution has been uneven across segments.

Technology, Products, and Strategic Differentiation: Rao's as the Growth Engine

While Campbell's is not a technology company, its product innovation and supply chain modernization represent critical strategic differentiators. The Rao's acquisition for $2.9 billion in March 2024 exemplifies management's bet on premiumization. Rao's dollar consumption returned to high single-digit growth in Q4 fiscal 2025, and the brand is expected to become Campbell's fourth billion-dollar brand. Rao's reaches only half as many households as Prego while commanding premium pricing, indicating substantial runway for expansion. Millennial household adoption has surged at more than twice the category pace, suggesting the brand resonates with the demographic that drives long-term consumption trends.

The company's innovation pipeline contributed approximately 3% to net sales in fiscal 2025, with successes like Milano White Chocolate driving a 27% increase in Milano dollar consumption and lifting overall Pepperidge Farm cookies to 3% growth. This demonstrates Campbell's can still generate organic growth in mature categories through targeted product development rather than relying solely on acquisitions. However, the Snacks segment's struggles—organic net sales declined 2-5% across fiscal 2025 quarters—reveal that innovation alone cannot overcome category headwinds when consumer spending shifts and competitive promotional activity intensifies.

Supply chain optimization represents the company's primary "technology" investment. The multi-year cost savings initiatives, substantially completed in July 2024, generated $950 million in pre-tax savings by streamlining manufacturing networks and IT infrastructure. The new PEEK program targeting $375 million in annual savings by 2028 focuses on network optimization, integration synergies, and indirect spend management. These savings are being deployed to offset inflation and tariff impacts rather than expanding margins.

Financial Performance: A Tale of Two Segments

Fiscal 2025 results provide clear evidence of the two-speed portfolio thesis. Consolidated net sales increased 6% to $10.3 billion, but this headline masks divergent segment trajectories. Meals & Beverages surged 15% to $6.05 billion, driven by a 15-point benefit from the Sovos Brands (SOVO) acquisition and strong underlying performance in broth and condensed soups. Operating earnings in this segment grew 10% to $1.08 billion, demonstrating that the acquisition is accretive and that core brands retain pricing power. The segment's operating margin compressed 100 basis points in Q4 to 17.3%, but this reflected a 50 basis point tariff impact and planned promotional investments, not structural deterioration.

Snacks tells a different story. Net sales declined 4% to $4.20 billion, with organic declines of 2-5% throughout the year. Operating earnings fell 14% to $560 million, and operating margins compressed from 13.3% in Q1 to 11.3% in Q2 before recovering modestly to 14.2% in Q4. The margin volatility stemmed from three factors: increased commercial investment to defend market share, operational supply chain headwinds in fresh bakery during the holiday period, and unfavorable mix from reducing lower-margin partner brands. Snacks represents 40% of revenue and its weakness creates a drag that Meals & Beverages cannot fully offset.

Consolidated gross margin declined 40 basis points to 30.4% as higher cost inflation and supply chain expenses overwhelmed productivity improvements. Marketing and selling expenses increased to 9% of sales from 8.6%, reflecting the Sovos Brands acquisition impact and higher advertising spend to support brand building. Administrative expenses fell to 6.6% from 7.6% due to cost savings, but this benefit will not repeat as incentive compensation normalizes in fiscal 2026. The net result: operating margin of 13.1% and net margin of 5.87% reflect a business managing multiple headwinds simultaneously.

Cash flow generation remains solid but shows pressure. Operating cash flow of $1.13 billion declined slightly from $1.19 billion due to working capital changes from tariff mitigation strategies. Free cash flow of $705 million supports the dividend, which consumed $459 million in fiscal 2025. The payout ratio of 76.6% is elevated but manageable given stable cash generation. Net debt to adjusted EBITDA of 3.6x is above the 3.0x target, reflecting the Sovos Brands acquisition, but management expects to reach the target by fiscal 2027 through debt reduction and EBITDA growth.

Outlook and Guidance: Tariffs Dominate the Narrative

Management's fiscal 2026 guidance reveals how severely tariffs are reshaping the earnings trajectory. The company expects reported net sales down 2% to flat, organic net sales down 1% to up 1%, adjusted EBIT down 9-13%, and adjusted EPS down 12-18%. At the midpoint, this implies a $0.40 EPS decline, with two-thirds attributable to net tariff impact and one-third to top-line trajectory and normalization of prior-year benefits. This guidance explicitly quantifies tariffs as the primary earnings driver, a rare level of transparency that underscores the severity of the headwind.

The tariff exposure is concentrated and material. Gross tariffs are projected at approximately 4% of cost of products sold, with about 60% related to Section 232 steel and aluminum tariffs on food-grade tin plate for cans. As CEO Mick Beekhuizen noted, "there's not an alternative source" for this material, forcing Campbell's to import despite 50% duties. The remaining exposure includes IPEA tariffs on Rao's imports from Italy. Management expects to mitigate approximately 60% of the impact through pricing actions, productivity, and cost savings, but this leaves a net 1.6% cost increase that will pressure margins.

The Snacks recovery timeline remains uncertain. Management anticipates stabilization in the second half of fiscal 2026, but this assumes incremental marketing support and innovation resonate with consumers who remain cautious and value-seeking. The guidance implies sequential improvement throughout the year, but Q1 will still face pressure from promotional timing shifts and lapping prior-year benefits. The Snacks turnaround is essential for achieving the flat organic growth midpoint; without it, the company would need even stronger Meals & Beverages performance to offset declines.

Cost savings provide a partial buffer. The PEEK program target increased 50% to $375 million annually by 2028, with $70 million expected in fiscal 2026. Combined with productivity initiatives targeting 5% of cost of goods sold, these savings should offset core inflation in the low single-digit range. However, they cannot fully neutralize tariff impacts, meaning margin compression is inevitable. The company plans to increase marketing investment to 9-10% of sales, suggesting management is choosing to protect brand equity rather than maximize short-term margins.

Risks and Asymmetries: Where the Thesis Can Break

The primary risk is that tariff mitigation proves less effective than modeled. Management's 60% mitigation assumption relies on pricing actions that could reduce volume if consumers trade down to private label. In Snacks, where private label penetration is rising and promotional intensity is high, passing through cost increases may be particularly challenging. If mitigation falls to 40-50%, the EPS impact could be $0.10-0.15 worse than guidance, representing a 20-30% downside to the midpoint estimate.

Snacks recovery failure represents the second major risk. The segment's Q4 operating margin of 14.2% remains well below historical levels, and the competitive environment shows no signs of easing. New entrants continue gaining share in salty snacks, and private label pressure in cookies and crackers persists. If organic sales decline 3-5% again in fiscal 2026 rather than stabilizing, consolidated EBIT could fall 15-18% rather than the guided 9-13%, creating a negative operating leverage cycle that magnifies the tariff impact.

On the positive side, Rao's growth could exceed expectations. The brand's high single-digit Q4 growth accelerated from earlier quarters, and its household penetration remains far below Prego's despite leading dollar share in premium Italian sauces. If Rao's achieves 15% pro forma growth and reaches the billion-dollar revenue mark faster than expected, it could add $50-75 million to operating earnings, offsetting 20-30% of the tariff headwind. Rao's is the only brand with clear momentum to outpace inflation and competitive pressure.

Consumer behavior shifts present another variable. The at-home cooking trend that benefits Meals & Beverages could accelerate if economic uncertainty persists, driving double-digit growth in broth and condensed soups. Conversely, if consumers resume dining out and reduce pantry stocking, the segment's 15% growth could decelerate to 3-5%, eliminating the primary offset to Snacks weakness. The company's 75% exposure to growing categories provides some protection, but category growth rates are moderating as post-pandemic normalization continues.

Competitive Context: Strength in Meals, Weakness in Snacks

Campbell's competitive positioning varies dramatically by segment. In Meals & Beverages, the company holds a dominant qualitative position in condensed soups and broth, with Swanson maintaining strong consumption growth despite share pressure from promotional timing. The broth category has accelerated since 2020, fueled by increased home cooking and slower private label recovery. This gives Campbell's pricing power and volume stability that peers cannot match. Rao's holds the top dollar share position in premium Italian sauces, growing 1.2 share points in Q4 while Prego remains a solid number two, creating a powerful one-two punch that competitors like Kraft Heinz's Ragu or Conagra (CAG)'s Hunt's cannot replicate.

In Snacks, the competitive dynamic reverses. Pepperidge Farm holds share in bakery and cookies, and Snack Factory grew share by 0.7 points in Q4, but Goldfish faces pressure from private label and new entrants. The salty snacks category has seen stepped-up promotional activity from new players, while cookies and pretzels face private label incursion. Campbell's lacks the scale of Kellanova (K)'s snack portfolio or PepsiCo (PEP)'s Frito-Lay, making it harder to absorb promotional costs and maintain margins. The planned reduction in partner and contract brands, while margin-accretive, reduces scale and could further erode negotiating power with retailers.

Financial comparisons highlight Campbell's middle-ground position. With 30.7% gross margins, Campbell's trails General Mills (34.4%) and Kraft Heinz (33.7%) but exceeds Conagra (25.5%). Its 13.1% operating margin lags Kraft Heinz (17.6%) and General Mills (15.6%), reflecting both scale disadvantages and Snacks segment pressure.

However, Campbell's 5.2% dividend yield exceeds all peers except Conagra's 8.1%, and its 14.9x P/E trades at a discount to the peer average, suggesting the market has already priced in some execution risk. The 3.6x net debt/EBITDA ratio is manageable but above the 3.0x target, limiting financial flexibility relative to Kraft Heinz's more conservative 0.5x ratio.

Valuation Context: Reasonable Multiples with Elevated Risk

At $29.91 per share, Campbell's trades at 14.9x trailing earnings, 8.5x EV/EBITDA, and 12.6x free cash flow. These multiples appear reasonable for a packaged food company with leading brands and a 5.2% dividend yield. The enterprise value of $15.99 billion represents 1.56x revenue, a slight discount to Kraft Heinz (1.89x) and General Mills (1.99x), reflecting lower growth expectations. The valuation suggests limited downside if management executes on the snacks turnaround and tariff mitigation, but also limited upside if headwinds persist.

The dividend payout ratio of 76.6% is elevated but sustainable given stable cash generation. The company generated $705 million in free cash flow in fiscal 2025 while paying $459 million in dividends, leaving $246 million for debt reduction and reinvestment. This coverage provides a margin of safety, but leaves little room for error if earnings decline more than guided in fiscal 2026. The 3.6x net debt/EBITDA ratio is the primary constraint, as management has committed to reaching 3.0x by fiscal 2027, implying $300-400 million in debt reduction that will compete with dividend growth and reinvestment.

Relative to peers, Campbell's valuation appears balanced. Kraft Heinz trades at a lower P/E (negative due to one-time charges) but higher EV/EBITDA, reflecting its larger scale and stronger margins. General Mills commands a premium multiple due to its diversified portfolio and higher ROE (30.9% vs Campbell's 15.6%). Conagra trades at a discount across all metrics, reflecting its lower margins and higher leverage. Campbell's sits in the middle—neither cheap enough to be a deep value play nor expensive enough to imply high growth expectations. This positioning means the stock's performance will be driven by execution rather than multiple expansion or compression.

Conclusion: Execution Determines Outcome

Campbell's Company enters fiscal 2026 as a transformed business with a clear split personality. Meals & Beverages, powered by Rao's momentum and at-home cooking trends, demonstrates the earnings power of a focused brand portfolio. Snacks, weighed down by category softness and competitive pressure, shows how quickly market dynamics can erode margins even for established players. The tariff headwind, representing two-thirds of the expected EPS decline, is the critical variable that will determine whether this is a buying opportunity or a value trap.

The investment thesis hinges on three factors: the speed of Snacks stabilization, the effectiveness of tariff mitigation, and Rao's ability to sustain premium growth. Management's guidance assumes a gradual second-half recovery in Snacks and 60% tariff mitigation—assumptions that appear reasonable but leave little room for execution missteps. The increased PEEK savings target of $375 million provides a buffer, but cannot fully offset 4% cost inflation from tariffs.

At current valuation levels, the market has priced in moderate headwinds but not a full-blown earnings collapse. The 5.2% dividend yield offers income while investors wait for the turnaround, but the 76.6% payout ratio limits dividend growth until earnings recover. For investors willing to tolerate near-term margin pressure and execution risk, Campbell's offers a reasonable entry point into a portfolio of leading brands undergoing active optimization. However, those seeking clear growth or margin expansion should wait for tangible evidence of Snacks recovery and successful tariff pass-through before committing capital. The story is not broken, but it is certainly not simple.