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A month has gone by since the last earnings report for Lamb Weston (LW). Shares have added about 5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Lamb Weston due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Lamb Weston Q2 Earnings & Sales Top Estimates, Fall Y/Y
Lamb Weston reported second-quarter fiscal 2021 results. Earnings of 66 cents per share declined 31% year over year due to elevated interest costs and lower income from operations, somewhat negated by a rise in equity method investment earnings. The bottom line, however, easily surpassed the Zacks Consensus Estimate of 62 cents per share. Net sales came in at $896.1 million, which declined 12% year on year, though it beat the consensus mark of $878 million. Volumes fell 14% year over year due to a decline in demand for frozen potato products in the away-from-home channel stemming from restrictions on restaurants and other foodservice operations to curb the coronavirus spread. Also, reduced outdoor dining traffic in many American markets due to the cold weather hurt volumes. Apart from this, volumes were negatively impacted by unfavorable year-over-year comparisons related to additional shipping days in the year-ago period quarter’s Thanksgiving holiday. Notably, the price/mix rose 2% on the back of improved pricing in the Retail and Foodservice segments, along with a better mix in the Retail unit.
Gross profit decreased 21.6% to $223.5 million due to soft sales and escalated manufacturing costs, which in turn stemmed from additional costs related to the impact of COVID-19 on Lamb Weston’s manufacturing and supply-chain operations, input cost inflation and costs associated with processing raw potatoes. This was partly cushioned by a change in unrealized mark-to-market adjustments related to commodity hedging contracts. SG&A expenses declined $7.7 million to reach $83.9 million on the back of reduced advertising and promotional costs as well as a decline in incentive compensation costs. This was somewhat compensated by investments to enhance the company’s operations and IT infrastructure.
Sales in the Global segment dropped 12% to $475.9 million. Volumes and price/mix fell 11% and 1%, respectively. Volumes were hurt by lower demand for frozen potato products away from home due to the adverse impact of coronavirus on restaurants and other foodservice-related traffic in the United States as well as core international markets. Also, an unfavorable comparison related to the Thanksgiving holiday, as discussed above, was a deterrent. Product contribution margin in the segment declined 28% to $92.7 million due to reduced sales volumes, elevated manufacturing expenses and adverse mix.
Foodservice sales declined 21% to $241.1 million. Price/mix rose 4%, whereas volumes declined 25%. Volumes were marred by lower demand due to pandemic-led traffic declines at restaurants and non-commercial customers like lodging and hospitality, schools, sports and entertainment, and workplace environments, among others. Soft restaurant traffic, unfavorable comparison related to Thanksgiving holiday and impact of the cold weather on outside dining hurt volumes in the latter weeks of the second quarter. Product contribution margin fell 21% to reach $87.7 million on account of reduced sales volumes, elevated manufacturing expenses and adverse mix, somewhat made up by improved pricing.
In the Retail segment, sales grew 7% to $140.7 million. Price/mix rose 7%, thanks to better mix stemming from higher sales of branded products. Volumes climbed marginally as robust growth in shipments of mainstream and premium brand offerings was countered by reduced shipments of private-label products. Product contribution margin improved 6% to $30.1 million on the back of improved mix and reduced advertising and promotional costs. This was partly countered by elevated manufacturing costs.
Management paid out dividends worth $67.2 million and declared a dividend hike of 2%. In the third quarter of fiscal 2021, the company intends to resume its share buyback plan, which was temporarily suspended during late fiscal 2020 due to the pandemic.
The company provided an update on the shipping trends for the first four weeks of the third quarter of fiscal 2021, until Dec 27, 2020. In this regard, the company’s shipments in the United States were nearly 85% of the prior-year levels, driven by shipments to QSR and large full-service chain restaurants, as well as to customers served by the Retail segment. Shipments to full-service restaurants in the Foodservice segment are expected to remain soft through the rest of the third quarter owing to government restrictions regarding the pandemic and limitations on outside dining due to the cold weather. Shipments to non-commercial customers in the Foodservice segment are also likely to remain weak throughout the third quarter.
Shipments in Europe were nearly 85% of the year-ago level. Demand was hampered by soft restaurant traffic due to the reasons discussed above. In fact, management expects these deterrents to continue weighing on shipments during the third quarter. Shipments to other core markets in Asia and Latin America were weaker than the shipment rates during the latter half of the second quarter. While the availability of a government-approved vaccine by mid-2021 may help relax social restrictions and improve restaurant traffic, the company expects tough and volatile conditions in the coming months. Management said that demand may weaken, particularly at full-service restaurants, due to continued social restrictions imposed by the government and limited outside dining owing to the cold weather.
On the cost front, the company is focused on taking steps to curtail the cost structure and expand efficiencies in manufacturing as well as commercial operations. These include closing down of facilities temporarily, modifying production schedules and more. However, the company anticipates continued incremental pandemic-led costs at its manufacturing, commercial, functional support and supply-chain operations. These include costs related to ensuring sanitization, and health and safety, increased transportation and warehousing expenses, and costs to retain functional support workers, among others.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -5.92% due to these changes.
At this time, Lamb Weston has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lamb Weston has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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