Lamb Weston Holdings, Inc. LW has been benefiting from the recovery in the Foodservice business. The company’s focus on capacity expansion also bodes well. A robust price/mix has been aiding the company amid escalated input cost concerns.
However, Lamb Weston has been witnessing a rise in input costs as well as increased SG&A expenses.
Shares of this Zacks Rank #3 (Hold) company have risen 16.3% in the past three months compared with the industry’s rise of 2.6%.
Factors Driving Lamb Weston’s Growth
Lamb Weston is focused on expanding capacity. It recently announced expansion plans for french fry processing capacity in Argentina, with the construction of a new manufacturing unit in Mar del Plata, Buenos Aires.
Management highlighted that it recently increased its stake in Lamb Weston Alimentos Modernos S.A., the South American joint venture, from 50% to 90%.
In July 2021, Lamb Weston announced the expansion plan of french fry processing capacity at its existing American Falls, Idaho facility, with an envisioned capacity to manufacture more than 350 million pounds of frozen french fries and other potato products annually. In March 2021, the frozen potato products company disclosed plans to build a new french fry processing facility in Ulanqab, Inner Mongolia, China.
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On its fourth-quarter fiscal 2022 earnings call, the company highlighted that it is on track with capacity expansion investments across Idaho and China.
Moving on, Lamb Weston has been benefiting from a recovery in the Foodservice business. In the fourth quarter of fiscal 2022, Foodservice sales soared 21% to $388.4 million. Volumes benefited from the continued rebound in demand at full-service restaurants and non-commercial channels like lodging and hospitality, healthcare, schools and universities, sports and entertainment and workplace environments.
However, the recovery was countered by reduced shipments due to supply-chain headwinds, including labor restrictions. That said, the price/mix jumped 24% and gained from product and freight pricing actions to counter inflation.
Lamb Weston’s top line has been benefiting from a robust price/mix, as witnessed in the fourth quarter of fiscal 2022. The price/mix increased 15% in the quarter.
In the fourth quarter, the top and bottom lines increased year over year and cruised past the respective Zacks Consensus Estimate. Results gained from the robust price/mix undertaken to counter the prevalent input, manufacturing and transportation cost inflation. Net sales growth in fiscal 2023 is likely to be backed by pricing actions, and an improved volume and mix.
Will Cost Woes Be Countered?
Although Lamb Weston’s fourth-quarter fiscal 2022 gross profit increased year over year, the metric was hurt by escalated costs. Escalated manufacturing and distribution costs on a per-pound basis, along with reduced sales volumes, were a concern for the metric.
Increased costs per pound reflected double-digit cost inflation from key inputs, mainly raw materials like edible oils and ingredients, as well as escalated transportation, packaging and labor costs. Higher costs per pound were also a result of labor and commodities shortages on production run rates. Such cost increases were somewhat offset by supply-chain productivity savings.
Inflation is likely to remain a major threat to the company’s costs and demand for fries, per the fourth-quarter earnings call. Management expects the gross margin to remain under pressure in the first half of fiscal 2023 due to considerable inflation for key production inputs, transportation and packaging and rising raw potato costs on a per-pound basis.
While the company is undertaking robust pricing actions, it is likely to lag inflation and the effect of elevated raw potato costs (per pound). The gross margin is also likely to bear the adverse impacts of supply-chain hurdles, resulting in operational bottlenecks like labor and commodities shortages.
However, the gross margin is expected to improve and reach normalized annual levels of 25-26% in the second half of the fiscal. In the fourth quarter of fiscal 2022, SG&A expenses escalated by $19.1 million to $118.2 million due to elevated compensation expenses and contributions to the Lamb Weston charitable foundation.
In fiscal 2023, Lamb Weston expects SG&A expenses in the band of $475-$500 million. This indicates greater investments to upgrade information systems and enterprise resource planning infrastructure, together with escalated compensation and benefit costs.
For fiscal 2023, management expects net sales growth in the band of $4.7-$4.8 billion, suggesting growth of 15-17%. Adjusted EBITDA (including unconsolidated joint ventures) is likely to come in the range of $840-$910 million. Net income is anticipated in the range of $360-$410 million.
Diluted earnings per share (EPS) are envisioned in the band of $2.45-$2.85. In fiscal 2022, adjusted EBITDA (including unconsolidated joint ventures) and adjusted EPS came in at $726 million and $2.08, respectively. The bottom-line growth in fiscal 2023 is expected to be backed by solid sales and gross profit expansion.
All said, we believe that Lamb Weston is likely to continue with its growth story.
Consumer Staple Stocks Worth a Look
Some better-ranked stocks from the sector are The Chef's Warehouse CHEF, Lancaster Colony LANC and J. M. Smucker SJM.
Chef’s Warehouse, a distributor of specialty food products in the United States, currently sports a Zacks Rank #1 (Strong Buy). CHEF has a trailing four-quarter earnings surprise of 355.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Chef’s Warehouse’s current financial-year sales suggests growth of 40.7% from the year-ago reported number.
Lancaster Colony, which manufactures and markets food products for the retail and foodservice markets, currently sports a Zacks Rank of 1. LANC delivered an earnings surprise of 170% in the last reported quarter.
The Zacks Consensus Estimate for Lancaster Colony’s current financial-year sales and EPS suggests growth of 9.6% and 38.3%, respectively, from the corresponding year-ago reported figures.
J. M. Smucker, which manufactures and markets branded food and beverage products, carries a Zacks Rank #2 (Buy) at present. J. M. Smucker has a trailing four-quarter earnings surprise of 20.8%, on average.
The Zacks Consensus Estimate for SJM’s current financial-year sales suggests growth of 4.4% from the year-ago period’s reported figure.
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