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Lamb Weston (LW) Q3 Earnings Lag Estimates, Fall Year Over Year

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Lamb Weston Holdings, Inc. LW posted third-quarter fiscal 2021 results, wherein both top and bottom declined year over year and the latter missed the Zacks Consensus Estimate. Results were hurt by soft demand due to the adverse impact of the pandemic on traffic at restaurants and other foodservice channels. Also, higher pandemic-related costs have been a deterrent.

Quarter in Detail

The company’s adjusted earnings of 45 cents per share tumbled 42% year over year and missed the Zacks Consensus Estimate of 51 cents per share.

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

Net sales came in at $895.8 million, which declined 4% year on year, though it beat the consensus mark of $822 million. Volumes fell 6% 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. Nonetheless, the rate of shipments improved on a sequential basis, from a 14% drop witnessed in the first half of fiscal 2021. This reflects solid demand recovery, mainly in the Global segment. 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 21.4% to $196.7 million due to soft sales and escalated manufacturing costs, which in turn stemmed from input cost inflation, as well as additional costs and inefficiencies associated with the impact of COVID-19 on Lamb Weston’s production, warehousing and transportation operations. Apart from these, the company saw escalated costs associated with capital, repair and maintenance activities, which were delayed at the time of the coronavirus outbreak. These were partly offset by a favorable change in unrealized mark-to-market adjustments related to commodity hedging contracts.

SG&A expenses escalated $8.2 million due to investments to enhance the company’s manufacturing, supply-chain structure and IT infrastructure, partly compensated by its cost management initiatives. EBITDA (including unconsolidated joint ventures) declined 27% to $167.1 million due to lower income from operations, which in turn was a result of soft sales and a reduced gross margin.

Segment Analysis

Sales in the Global segment dropped 2% to $478.5 million. Volumes fell 2%, hurt by lower demand for frozen potato products in the away-from-home category due to the adverse impact of coronavirus on restaurants and other foodservice-related traffic in the core international markets. Shipments to chain restaurant customers in North America grew nominally year over year, including gains from higher sales volumes of limited-time-offering products. Price/mix remained flat as better price was negated by adverse mix. Product contribution margin in the segment declined 27% to $79.3 million.

Foodservice sales declined 22% to $219.5 million. Price/mix rose 2%, whereas volumes declined 24%. 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, healthcare, and workplace environments. However, shipment and order trends witnessed improvements as the quarter progressed. This was backed by the impact of relaxation of governments’ restrictions on restaurant traffic, together with gains from a relatively mild winter. Product contribution margin fell 30% to reach $70.2 million.

In the Retail segment, sales grew 23% to $162.5 million. Price/mix advanced 10%, thanks to better mix stemming from increased sales of branded products. Volumes grew 13% as robust growth in shipments of mainstream and premium brand offerings was countered by reduced shipments of private-label products. Product contribution margin improved 15% to $33.1 million.

Other Financial Details

Lamb Weston ended the quarter with cash and cash equivalents of $714.3 million, long-term debt and financing obligations (excluding current portion) of $2,712.3 million and total shareholders’ equity of $451.7 million.

The company generated $374.8 million as net cash from operating activities during the 39 weeks ended Feb 28, 2021, wherein capital expenditures amounted to $106.7 million. Management paid out dividends worth $33.7 million and bought back 164,678 shares for $12.7 million.

More Updates

Lamb Weston, in March 2021, unveiled plans to build a new french fry processing facility in Ulanqab, Inner Mongolia, China. Construction of this facility, with a capacity to produce more than 250 million pounds of frozen french fries as well as other potato products per year, is anticipated to be concluded in Lamb Weston’s first half of fiscal 2024. The investment is likely to be nearly $250 million. Notably, this will be an addition to the company’s existing production capacity in China, which is the one in Shangdu, Inner Mongolia.

The company provided an update on the shipping trends for the first four weeks of the fourth quarter of fiscal 2021, until Mar 28, 2021. We note that management has offered a comparison with shipments during the fourth quarter of fiscal 2019, as it serves as a more meaningful base. This is because the fourth quarter of fiscal 2020 was largely affected by pandemic-led restrictions.

The company’s shipments in the United States were nearly 90% of the fourth-quarter fiscal 2019 level. Shipments to QSR and large full-service chain restaurants formed more than 85% of the abovementioned base period and this rate is likely to continue for the remainder of the fourth quarter of fiscal 2021. Shipments to customers by the Foodservice segment were about 90% of the base level, with the rate expected to continue through the fourth quarter. Further, shipments to non-commercial foodservice customers are expected to remain weak. Finally, shipments to customers served by the Retail segment were about 110% of the fourth-quarter fiscal 2019 level, though the rate may go down for the rest of fourth-quarter fiscal 2021.

Shipments in Europe were nearly 85% of the base period. The company said that this rate may decline in the remaining parts of the quarter, given the increased government restrictions in Europe, due to the resurgence of coronavirus cases. Shipments to other core markets in Asia, Latin America and Oceania were nearly 75% of the base period. Management expects shipment rates to increase slowly in the remainder of the fourth quarter, in markets where social restrictions are being eased by governments.

Management believes that the scope of the wide availability of a government-approved vaccine by mid-2021 may help relax social restrictions and, in turn, lead to improved restaurant traffic. Though Lamb Weston expects to continue battling tough and volatile operating conditions till the coronavirus spread is entirely contained, management expects global restaurant traffic to improve throughout calendar 2021. In fact, this may help overall frozen potato demand to reach the pre-pandemic level (on a run-rate basis) by the end of 2021.

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. However, the company anticipates continued incremental pandemic-led costs at its manufacturing, commercial, functional and distribution operations. These include costs related to ensuring sanitization, improved health and safety for employees, increased transportation and warehousing expenses, and reduced overall factory utilization and shutdown-related costs, among others.

Shares of the Zacks Rank #3 (Hold) company have gained 5.3% in the past three months compared with the industry’s growth of 7.2%.

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