Lamb Weston Gains on Robust Sales Trend, Cost Woes Linger

Lamb Weston Holdings Inc. LW is witnessing a robust top-line trend. The top line has been benefiting from the company’s efficient price/mix, strong Global segment, focus on limited time offerings (or LTOs) and expansion efforts. Such upsides have been driving this Zacks Rank #3 (Hold) stock amid cost-related hurdles as well as challenges in Europe.

Markedly, Lamb Weston’s shares have surged 37.8% in the past six months, outpacing the industry’s growth of 5.8%. Let’s delve deeper.

Factors Driving Lamb Weston’s Performance

Lamb Weston’s sales have been rising year over year for a while. Also, sales surpassed the Zacks Consensus Estimate for the 12th straight time, when it reported first-quarter fiscal 2020 results. Moreover, the bottom line increased 8% year over year. Sturdy performance in the quarter reflects continued gains from price/mix, expansion efforts, and strength in commercial and supply-chain networks along with brand development.

Notably, price/mix rose 2% each at the Global and Foodservice units, while the metric grew 3% in the retail segment. The rise in price/mix across these segments was supported by improved mix and pricing actions. In fact, improved price/mix and volumes drove the gross profit during the first quarter. The Global segment accounted for more than half of Lamb Weston’s first-quarter fiscal 2020 sales and remains a major driver for the future. Sales at this segment increased 11% to $517.6 million, with volumes and price/mix rising 9% and 2%, respectively. Continuity of such trends is likely to augment sales further.

Lamb Weston has been also benefiting from LTO innovation, which plays a key role in the company’s long-term prospects. Incidentally, LTOs helped drive growth and market share in fiscal 2018 and 2019. Apart from this, Lamb Weston is expected to continue reaping benefits from its acquisitions, joint ventures and capacity expansion efforts.

Hurdles Likely to be Countered

Lamb Weston is witnessing cost increases for input materials as well as manufacturing. A rise in manufacturing costs was caused by inefficiencies and depreciation associated with the company’s french fry production line in Oregon, during the first quarter. Such high costs exerted pressure on the gross margin. Rising costs were also a drag on product contribution margins in the Global, Retail and Foodservice units. Well, the company expects increased input and manufacturing costs to continue in fiscal 2020. Additionally, the company is witnessing rising SG&A costs and challenges in Europe.

Incidentally, a poor potato crop scenario in Europe has been affecting Lamb Weston’s performance for a while. In fact, adversities related to the poor potato crop yield witnessed last year have led to higher raw potato costs. This put pressure on the company’s earnings from unconsolidated joint ventures — Lamb Weston/Meijer in Europe and Lamb Weston/RDO in Minnesota — in the first quarter. Potato harvest in Europe will likely be under pressure due to adverse weather conditions. Moreover, costs of potatoes are expected to decline only from the second half of the fiscal year.

While these factors raise concerns, we expect Lamb Weston’s growth efforts to help counter these headwinds and remain in investors’ good books.

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