Reflection Paper (stages 3 of the project)

Stage 2 Group discussion input

The companies in the processed & packaged goods industry seem to be on the decline as far as business goes in the last few years. Conagra brands and Campbell Soup are both companies that seem to have the same declining pattern over the last three years. While Conagra brands is clearly not in a position as good as Campbell Soup, some of the main categories on the financial statements have the same downwards trends. The cost of revenue for Conagra brands was about 10 percent higher for the three years shown than it was for Campbell Soup. I think the cost of revenue could be paying a substantial role in the downward trend that seems to be happening in the industry. Other aspects that may be effecting the industry are how people are eating today. It seems as though people are trying to eat a little bit healthier and fresher than in the past. This may mean businesses in the processed and packaged goods industry are going to have to reevaluate the products they are making and possibly change the business model they have been following to account for customer demand changes.

Additionally, the net income for Conagra brands and Campbell Soup is showing a continuously decreasing amount over the last three years. The total current assets for the companies are approximately the same percentages and the percentage analysis for both companies are mainly in the negative amounts. Along with these amounts, the return on assets and return on equity are continually decreasing for both companies. Business is still going much better for Campbell Soup since although declining, the percentages shown are still positive amounts, Conagra brands on the other hand have been in the negative amounts for a couple of years now. Right now, Conagra is showing a stock price of $39.79 and an RSI of 63.05 (PRNewswire, 2017). Campbell Soup is showing a stock price of $57.48 and an RSI of 49.43 (PRNewswire, 2017). Altogether, both companies are showing a decline in business and profitability.

Resources

PRNewswire, (2017). Stock performance review on processed & packaged goods industry- general mills, conagra brands, campbell soup, & flowers food. Retrieved by http://www.prnewswire.com/news-releases/stock-performance-review-on-processed--packaged-goods-industry----general-mills-conagra-brands-campbell-soup-and-flowers-foods-626712831.html

Like the Campbell Soup Company, General Mills, Inc. experienced a decrease in revenues over the three-year period from 2014 to 2016 as well. While General Mills generates higher net sales on an annual basis, the common size analysis of the income statement of both companies indicates that cost of revenue and gross profits as a percentage of sales are comparable averaging around 65 percent and 35 percent respectively.

Campbell’s inventory as a percentage of sales is higher at 12 percent versus General Mills’ 7 percent. This may have contributed to Campbell’s higher number days of sales in inventory at 68.09 days versus General Mills’ 48.07 days in 2016. Therefore, I agree with your assessment that Campbell Soup need to do a better job at managing its inventory, as it appears to keep a higher level of inventory on hand which ties up capital.

Campbell’s liquidity ratios are an area of concern as they indicate that the company’s liabilities are greater than its assets. The company’s quick ratio of .38 in 2016 indicates that the company had $0.38 of liquid assets available to cover each $1 of current liabilities. Currently, the company is not able to pay off its debts as they become due and will most likely have to take on more debt in the next 12-months to meets its obligations. This seems to be a common theme in the food processing industry as General Mills’ quick ratio in 2016 was 0.50 and Conagra Brands 0.79.

You indicate that Campbell Soup needs to improve its cash conversion cycle (CCC) by increasing the amount of time it settles its accounts payable however; you don’t indicate what these numbers are. I calculate that in 2016, the company’s days payable outstanding was 94 days, up from 87 days in 2015, which means they were keeping their cash on hand longer. This seems like an already high number which leads me to believe that creditors may not be amenable to extending this time further. Due to the high number of days payable outstanding in 2016, Campbell’s CCC was 2.67, down from 10.76 in 2015. In comparison, General Mills’ days’ payable in 2016 was 69.59, up from 52.62 days in 2015. It appears that both companies were holding on to their cash longer in 2016, most likely due to a decrease in revenues.

Campbell’s return on equity (ROE) has decreased over the most recent three-year period, however its 2016 return of 36.70 percent in comparison to other companies’ ratios in the industry such as General Mills’ return of 34.43 percent and Conagra Brands at 11.65 percent indicates that the company is effectively using its investors’ funds (Return…Ratio, n.d.).

In conclusion, a comparison of all four companies in the food processing industry used in this project indicate that this industry has experienced decreasing sales over the most recent three-year period. As I commented to Kelsey I believe that decreasing sales in this industry is directly related to the wide-spread offering of lower-priced private store brands and the increasing preference for less-processed, healthy food. It will be interesting to see if this trend continues in the future.

Return on Equity Ratio. (n.d.). Retrieved on June 8, 2017, from http://www.myaccountingcourse.com/financial-ratios/return-on-equity