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Wilbur Ross Vindicated by Campbell Soup Disaster

WILBUR-ROSS Campbell Soup
CNBS

Campbell Soup chief Denise Morrison unexpectedly stepped down on Friday, at the same time as the company posted a $393 million loss and issued a bleak outlook for the year.

Shares of Campbell fell 12 percent in trading Friday, sinking to a more than five-year low and putting it on track for its worst one-day performance in this century.

“While our organic sales in the quarter were stable in this difficult environment, our gross margin performance was below our expectations. Based on our third-quarter results and outlook for the balance of the year, we are lowering our fiscal 2018 earnings guidance,” Campbell’s Chief Financial Officer Anthony DiSilvestro said.

On a conference call with analysts, DiSilvestro twice cited the steel and aluminum tariffs as hurting the company’s profit margins.

“At this stage, given what we know about accelerating cost inflation in part due to the anticipated impact of import tariffs and the continuing headwind on transportation and logistics cost, we expect our margins will be down in fiscal 2019,” he said.

Campbell’s gross margin decreased from 35.9 percent to 29.1 percent. Excluding things that the company said distorted comparability in the current year, adjusted gross margin decreased 3.9 percentage points to 32.0 percent.

This is a major vindication of the Commerce Secretary Wilbur Ross’s claim that the steel and aluminum tariffs would not hurt consumers. Although many big  corporations reacted to the announcement of tariffs with warnings that consumers would be forced to pay higher prices, the evidence so far is that corporations have been forced to absorb the costs of tariffs rather than passing them on. Instead of squeezing the pocketbooks of American households, the tariffs are putting pressure on record-high corporate profits.

When Ross went on CNBC to explain that tariffs wouldn’t hurt consumers, he held up a can of Campbell’s soup to make his point.  The company reacted by claiming that prices would increase.

“Any new broad-based tariffs on imported tin plate steel — an insufficient amount of which is produced in the U.S. — will result in higher prices on one of the safest and more affordable parts of the food supply,” a spokesperson for Campbell said in a statement to CNBC.

Friday’s quarterly results show that Campbell does not, at least in the short term, have the pricing power that would allow it to pass the costs on to consumers. Score one for Ross.

This was, of course, predictable. Corporate profits have been hitting record highs even while consumer prices have remained lower than expected, which suggests that corporations do not have much ability to raise prices but do have room to absorb higher costs.

Think about this in terms of tax cuts. The Trump administration’s corporate tax cuts promise much higher after-tax profits for businesses. If corporation profit margins were fixed and prices were flexible, this would result in huge price-cuts for American consumers. Instead, corporations have used the tax savings to pay bonuses, raise wages, pay dividends, and conduct massive share buybacks. The margin is flexible, while the prices are stable.

The steel and aluminum tariffs work in the opposite direction, compressing margins. But there is no evidence they are pushing up prices.

You will probably hear a lot more of Campbell’s style tariff blaming in the coming months. Corporate chieftains love to excuse poor results by pointing to exogenous factors. Sometimes it’s the weather. Sometimes it’s global macroeconomic conditions. And now we’ll probably be hearing more about Trump administration trade policies.

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