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Lamb Weston (LW) Gains 10% in 3 Months: Will Momentum Stay?

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Zacks Equity Research
·6 min read
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A number of food companies are benefiting from strength in their retail channels, thanks to increasing demand amid the pandemic-induced elevated at-home consumption. This is also helping these players counter declines in the foodservice channel, stemming from high social-distancing trends. One such company witnessing these trends is Lamb Weston Holdings, Inc. LW, whose shares have gained 10.4% in the past three months compared with the industry’s rise of 3.4%.

Apart from the abovementioned factors, this producer, marketer and distributor of value-added frozen potato products has been gaining from its robust price/mix and efforts to boost capacity. However, costs associated with the pandemic have been a downside. Let’s delve deeper.

Factors Boosting Lamb Weston’s Growth

Lamb Weston’s top line has been benefiting from a robust price/mix, as also witnessed during the second quarter of fiscal 2021. During the quarter, 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. This somewhat aided sales, which were otherwise negatively impacted by lower volumes. Price/mix rose 7% and 4% in the Retail and Foodservice segments, respectively. Continuity of such trends is likely to augment sales.

Additionally, the company has been undertaking initiatives to boost offerings and operating capacity. These efforts enable the company to effectively meet rising demand conditions for snacks and fries. Markedly, it completed the acquisition of joint venture interests in Lamb Weston BSW sometime around mid-fiscal 2019. Among other moves, the company acquired Australia-based companies, Ready Meals and Marvel Packers, in 2019 and 2018, respectively. These buyouts have bolstered Lamb Weston’s market share in Australia. Speaking of capacity expansion endeavors, the company completed the expansion of a facility located at Hermiston, Oregon, on Jun 18, 2019. The expansion has facilitated the addition of a new processing line for increasing the production of frozen french fries.

In the last reported quarter, both earnings and sales beat the consensus mark. Though sales were marred by continued hurdles in the foodservice channel, the company’s Retail business remained strong. We note that Lamb Weston enjoys a solid Retail segment, which comprises revenues from private label and branded items to mass merchant, grocery and club customers across North America. The company’s Retail unit sales rose 7% to $140.7 million in the second quarter. Price/mix rose 7%, thanks to better mix stemming from higher sales of branded products. Volumes climbed marginally on the back of robust growth in shipments of mainstream and premium brand offerings.

Higher at-home consumption amid the pandemic is likely to keep aiding Lamb Weston’s Retail business in the near term. A number of other food companies like The J.M. Smucker SJM, Post Holdings POST and Flowers Foods FLO, to name a few, have been gaining on high retail demand. Lamb Weston 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.

Factors Acting as Impediments

Lamb Weston has been bearing the brunt of the adverse impact of the pandemic on traffic at restaurants and other non-commercial foodservice customers such as lodging, hospitality, healthcare, schools and universities, among others. This has been denting demand in the away-from-home lines. Such challenges were witnessed in the company’s second-quarter fiscal 2021 results, wherein Foodservice sales declined 21% to $241.1 million. 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 comparisons related to the Thanksgiving holiday and the impact of the cold weather on outside dining hurt volumes in the latter weeks of the second quarter. Shipments to full-service restaurants in the Foodservice segment are expected to remain soft through the rest of the third quarter due 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. We note that a major resurgence in coronavirus cases in the United States and Europe caused the government to levy more stern social limitations. This is likely to have a greater impact on traffic and demand.

Apart from this, high COVID-19-related costs have been weighing on Lamb Weston’s gross margin for the past few quarters now. In the second quarter of fiscal 2021, 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. The company saw input cost inflation in low-single digits in the quarter under review. It anticipates continued incremental pandemic-led costs at its manufacturing, commercial, functional support and supply-chain operations. Nonetheless, Lamb Weston is taking strong measures to curtail the cost structure and expand efficiencies in manufacturing as well as commercial operations.

Wrapping Up

Continued strength in the Retail unit amid the increased at-home consumption due to the pandemic is likely to work in Lamb Weston’s favor. Also, the Zacks Rank #3 (Hold) company’s other growth drivers are likely to help it tide over the aforementioned barriers and keep its growth story going.

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