Is Campbell Soup making a bad decision to sell its fresh food business?

Is Campbell Soup making a bad decision to sell its fresh food business?

Investors may think so, given the more than 2% slide in the stock on Thursday, after the company announced a new strategic direction with plans to offload its troubled fresh food and international businesses to refocus on snacks and meals and beverages, including soup.

‘Simply put, we lost focus.’

On a call with analysts, Keith McLoughlin, interim chief executive, offered a frank appraisal of the missteps that have led the company to its current troubled state, which the board is aiming to turn around following a strategic review. “Simply put, we lost focus,” said McLoughlin, according to a FactSet transcript.

“We had too many initiatives that made the company unnecessarily complex. We were in the food business and the [agriculture] business. We had growth businesses, and we had cash businesses. We were focused on startup businesses and venture-capital investment. We aggressively pursued the important consumer megatrend of health and well-being without having clarity on our source of uniqueness or whether we brought a competitive advantage to the space, and we depended too much on M&A to shape our business strategy.”

The executive was referring to the big push toward healthier food that was the hallmark of former Chief Executive Denise Morrison, who left abruptly at the end of the first quarter. Campbell CPB, -2.10% is now planning to sell some of the businesses that Morrison championed, including Bolthouse Farms, whose products include cold juices, salad dressings and bagged carrots, and Garden Fresh Gourmet salsa and hummus and refrigerated fresh soups.

It is also planning to offload Arnott’s, an Australian biscuits company, and Kelsen, which makes Danish butter cookies that are big sellers in Asia. The company said the assets up for sale have drawn interest from several parties. The company will use the proceeds to pay down debt, which more than tripled earlier this year when it acquired Snyder’s Lance pretzels, chips and nuts in a deal valued at about $6.1 billion.

The company’s long-term debt stood at $8.5 billion at the end of April, according to FactSet.

The company will also invest more in marketing its canned soup, which was elevated to iconic status by pop artist Andy Warhol in the 1960s.

“We benefit from high brand equity with consumers strong product attributes and enviable market positions,” said McLoughlin. “In fact more than 95% of all U.S. households have a Campbell product in them.”

Some observers said the company may be making a mistake in abandoning fresh food, given the preference for it among millennials and Gen Z members. Morrison’s strategy aimed to respond to what she called the “seismic shift” in eating habits that other food companies are also struggling to address. In the past few years, the big food companies have worked to eliminate additives and chemicals from their supply chains, moving away from such ingredients as battery-produced eggs and processed meats.

“There is no doubt that the fresh food segment they are competing in is growing,” said Steve Stallman, president of Stallman Marketing, president of the Food Consultants Group and former president of the Direct Marketing Association of Southern California.

Clark Wolf, owner of food and restaurant consulting firm Clark Wolf Company, said Campbell may have confused customers and created an identity crisis by pushing freshness and health, alongside its traditional business of canned and packaged products.

“In this day and age, identity is more important than diversification,” he said. “Being a merchant is much more visceral than people understand. you have to believe in what you are selling and if it’s in conflict with your core identity, you need to resolve that.”

Campbell may simply have failed to understand the fresh food business. Poor carrot harvests and juice recalls hurt Bolthouse, as the Wall Street Journal has reported. The company tried to overcome those issues with a new management team, but sales and profit continued to slump. The Campbell Fresh segment posted an operating loss for the second quarter, offsetting growth in global biscuits and snacks.

Stifel analysts led by Christopher Growe said the results of the strategic review are underwhelming.

“Campbell Soup has struggled to achieve its long-term guidance over the past 5+ years, and we believe soft sales growth environment will persist for the foreseeable future, given the company’s exposure to the slow growing/declining soup business and its lack of international sales exposure (business to be divested),” they wrote in a note.

Growe is not convinced the planned divestitures will suffice in appeasing activist shareholder Dan Loeb, whose Third Capital hedge fund has been lobbying for an outright sale of the company to a food rival, such as Kraft-Heinz Co. KHC, -1.82% . “The potential for a proxy fight is likely,” he said. Stifel rates the stock at hold with a $35 price target.

But Wells Fargo analyst John Baumgartner said Third Point’s presence is a positive as Loeb will hold management accountable for their actions.

“As ‘the Board remains open and committed to evaluating all strategic options to enhance value in the future’, it also appears the door remains open for something else but given depressed industry valuations, CPB’s own fixer-upper status, and likely limited cost synergies, it’s hard to see a sale having maximized value right now,” he said. Wells Fargo rates the stock at market perform with a $42 price target.

CFRA downgraded the stock to hold from buy on the news, but said it expects Loeb to hold off for now. “We think activist investors (Daniel Loeb of Third Point LLC) and majority shareholders (John T. Dorrance family) will hold off on pushing for the sale of the entire business until the impact of the divestitures and new core business focus is more clear,” said analyst Elizabeth Vermillion.

Jonathan Feeney, an analyst at Consumer Edge, was more upbeat, saying the move is logical and does not preclude any further moves, such as splitting up snacks and meals or conducting other strategic sales.

Consumer Edge rates the stock overweight with a $48 price target.

Campbell Soup shares have fallen 18% in 2018, while the S&P 500 SPX, -0.44% has gained 9% and the Dow Jones Industrial Average DJIA, -0.53% has risen 5%.