These are hardly the best of times for most food companies. Branded food is never a market with high overall volume growth in the best of times, and now price-conscious consumers are making sure that any significant pricing action has real volume consequences. At the same time, price inflation seems nearly unrelenting.

That limits just how much Campbell Soup (NYSE:CPB) can do with its own strategy. At the same time, it's a bit curious that a company that arguably has margin to spare is willing to trade growth to preserve those leading margins.

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A Tough Second Quarter
Campbell did more or less as it was expected in the fiscal second quarter, but results were certainly not all that impressive in an absolute sense. Revenue fell 1% (and was down 1% organically), as a 3% volume decline offset 3% price leverage. U.S. soup sales were down 2%, as stronger condensed soup sales (up 5%) offset weaker ready-to-serve sales (down 12%). While U.S. beverage sales were up 4%, snacking and baking was flat, and international soup and beverage sales fell 5%.

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Margins were a mixed bag. Gross margin fell about one point this quarter, as Campbell is seeing the same sort of cost pressure as Heinz (NYSE:HNZ), Kraft (NYSE:KFT) and General Mills (NYSE:GIS), and can only offset so much with pricing and productivity actions. Campbell did keep a pretty firm hold on SG&A expenses, despite a small increase in marketing. Operating income still fell more than 7%, and beverages, baking and international all saw double-digit declines in segment profits. (To know more about income statements, read Understanding The Income Statement.)

Is Delaying Reinvestment the Right Move?
Although management has not explicitly backed away from the idea that this fiscal year would be one of reinvestment, results to date and guidance does seem to suggest less spending than initially discussed. In the short run, this will preserve margins in a tough pricing/volume market.

Longer term, I'm not sold on this as a strategic move. Campbell Soup has some of the best margins and returns on capital in the food sector and the company seems intent on preserving them. Rivals like General Mills and Treehouse (NYSE:THS) do seem willing to trade some margin for share, though, and Campbell could end up losing the volume it needs to drive long-term growth.

In the soup business, for instance, actual year-on-year performance was worse than it looks as the company benefited from a soft comp. What's more, at least some of that double-digit decline in ready-to-serve was a byproduct of lower promotional spending.


What's more, cutting back on R&D can really hurt in the longer term; food isn't thought of as an innovative business, but small changes in packaging can make a big difference.

Not Losing Too Much Ground ... Yet
Fortunately for Campbell Soup, it doesn't look as though the company's decisions are making a huge impact when it comes to volume. Volume declines have been less-bad at ConAgra (NYSE:CAG), General Mills and Kraft, but not by much. Moreover, Campbell already has an efficient, focused, business and there is margin there to sacrifice if management chooses to go that route.

The Bottom Line
Despite weak volumes and cost inflation pressures, the Street is still happy to give relatively robust valuations to food stocks. Not surprisingly, then, Campbell Soup is not much of a bargain today. It is slightly below fair value and it does offer a nice dividend yield, but investors have no need to rush into this stock today. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.