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Lamb Weston (LW) Gains on Retail Strength Amid Foodservice Woes

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  • LW

Lamb Weston Holdings, Inc.’s LW retail business has been performing well amid the pandemic-led higher at-home consumption. This along with a robust price/mix has been aiding the company in the face of softness in the foodservice business and high COVID-19-related costs. Further, higher at-home consumption amid the pandemic is likely to keep aiding Lamb Weston’s retail business in the near term.

Incidentally, the Zacks Consensus Estimate for fiscal 2021 earnings per share has risen 1.3% to $2.34 in the past 30 days. Additionally, shares of this renowned frozen potato products producer, marketer and distributor have rallied 20.8% in the past six months, comfortably outpacing the industry’s growth of 8.4%.

Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise

Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise
Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise

Lamb Weston Holdings Inc. price-consensus-eps-surprise-chart | Lamb Weston Holdings Inc. Quote

Retail Business Strength & Solid Price/Mix

Although Lamb Weston’s second-quarter fiscal 2021 sales were marred by continued hurdles in the foodservice channel, its retail business remained strong. Markedly, the company boasts a solid Retail segment, which comprises revenues of private label and branded items to mass merchant, grocery and club customers across North America. The company’s Retail segment sales grew 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.

Product contribution margin improved 6% to $30.1 million on the back of improved mix and reduced advertising and promotional costs. Higher at-home consumption amid the pandemic is likely to keep aiding Lamb Weston’s retail business in the near term. Incidentally, 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.

Additionally, the company’s top line has been benefiting from a robust price/mix, as also witnessed during the second quarter. 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. These 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.

Foodservice Softness & High COVID-19 Costs

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 both top and bottom lines declined year over year. Foodservice segment 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 comparison 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, 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. We note that a major resurgence in coronavirus cases in the United States and Europe has caused the government to levy more stern social limitations. This is likely to have a greater impact on traffic and demand.

Apart from these, high COVID-19-related costs have been weighing on Lamb Weston’s gross margin for the past few quarters. 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 its manufacturing and supply-chain operations, input cost inflation and costs associated with processing raw potatoes. 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, health and safety, increased transportation and warehousing expenses, and costs to retain functional support workers, among others.

Nonetheless, the Zacks Rank #3 (Hold) company is taking strong measures to curtail the cost structure and expand efficiencies in manufacturing as well as commercial operations. This, together with continued strength in the Retail segment, should help the company battle the abovementioned challenges.

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