Campbell Soup's Q3 Earnings Mask Structural Challenges: Why the Snacks Struggle Warrants Caution

Campbell Soup (CPB) reported third-quarter fiscal 2025 earnings that beat Wall Street's expectations, driven by strong performance in its Meals & Beverages division. However, the company's ongoing struggles in its Snacks segment—alongside margin pressures, tariff risks, and a bleak Zacks Rank #4 (Sell) rating—highlight critical challenges that threaten its long-term growth trajectory. While short-term results may satisfy investors, the structural issues plaguing CPB's snacks business and its ability to navigate macroeconomic headwinds suggest a cautious stance is warranted.

Q3 Results: A Mixed Bag

Campbell reported net sales of $2.48 billion, a 4% rise year-over-year, with adjusted EPS of $0.73, surpassing estimates of $0.65. The Meals & Beverages division delivered a 6% organic sales surge, fueled by strong demand for soups, broths, and Italian sauces. Key brands like Swanson Broth and Pacific Foods saw robust growth, aided by at-home cooking trends.

However, the Snacks division posted a 5% organic sales decline, with three of eight leadership brands holding or gaining share—Pepperidge Farm Bakery, Snack Factory Pretzel Crisps, and Lance—while the rest lagged. Categories like crackers and chips faced heightened competition, and Goldfish struggled with post-launch lapping. The segment's consumption fell 3%, and its dollar share dipped 0.2 percentage points year-over-year.

Margin Pressures Mount

Despite the top-line beat, margin trends are concerning. Adjusted gross profit margins contracted by 110 basis points, driven by lower net pricing, inflation, and operational inefficiencies. Meals & Beverages margins fell 100 basis points, while Snacks margins, though improving sequentially, remained down 90 basis points year-over-year.

The company also highlighted an incremental tariff impact of $0.03–$0.05 per share for fiscal 2025, primarily affecting soup exports, tinplate, and pasta imports. These costs are excluded from current guidance, adding uncertainty to the outlook.

The Zacks Rank #4 (Sell) and Why It Matters

Campbell's stock has underperformed the S&P 500 by 18.7% year-to-date, and the Zacks Rank #4 (Sell) underscores investor skepticism. This rating reflects unfavorable earnings estimate revisions and a weak outlook for the Food - Miscellaneous sector, which sits in the bottom 32% of all Zacks industries. Even though CPB beat Q3 estimates, the broader industry's struggles—exemplified by peers like General Mills (GIS), which faces its own margin and sales declines—suggest systemic challenges.

Key Risks and Mitigation Strategies

1. Snacks Recovery Lag: Management admits the Snacks segment's turnaround is slower than hoped. While initiatives like revitalizing Goldfish, launching new chip flavors, and focusing on premium products (e.g., Pepperidge Farm's Farmhouse Brioche) show promise, execution risks remain.
2. Tariff and Inflation Headwinds: Rising input costs and trade-related expenses could further squeeze margins, especially if tariffs escalate.
3. Consumer Spending Shifts: Snacks face headwinds from cautious discretionary spending, while Meals & Beverages benefits from at-home cooking trends may not offset this indefinitely.

Campbell is tackling these issues through cost-saving measures ($130 million in savings this year) and operational efficiencies, such as ERP system integration for the Sovos acquisition. However, these efforts are incremental, and the company's leverage ratio—driven by debt used to fund dividends and buybacks—remains a concern.

Valuation and Guidance: A Glass Half-Empty

The company reaffirmed fiscal 2025 guidance but now expects results to land at the low end of the $2.95–$3.05 EPS range. With shares trading at ~$34.04—near 52-week lows—the stock's valuation already factors in disappointment. However, risks remain skewed to the downside, particularly if Snacks underperformance worsens or tariffs escalate.

Conclusion: Caution Remains the Watchword

While Campbell's Q3 beat and cost-saving progress are positives, the Snacks segment's structural issues and macroeconomic risks paint a cautionary picture. The Zacks Rank #4 (Sell) and sector-wide challenges reinforce that this is not a stock to chase. Investors are better served waiting for clearer signs of Snacks stabilization, tariff resolution, or a material shift in consumer demand before considering CPB a buy.

In the near term, CPB's stock faces a tough road. Until the Snacks division shows sustained improvement, the company's growth story will remain incomplete—and investors would be wise to stay on the sidelines.