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Shares of Lamb Weston Holdings LW have significantly outperformed the industry, in a year’s time, on the back of limited time offers (LTO) innovations, strong global segment and aggressive pricing strategy. Notably, the company has rallied 51.3%, comfortably outpacing the industry’s decline of 9.3%.
Let us delve deeper into the factors to see if this Zacks Rank #3 (Hold) stock can sustain this momentum amid the hurdles.
Impressive Sales Growth
Lamb Weston’s sales have been increasing year over year ever since it completed a complete fiscal, post its spin-off from Conagra Brands. The strong sales performance is attributable to its limited time offers or LTO innovations, which play a key role in the company’s long-term prospects.
Further, the company’s global segment, which accounted for more than half of its third-quarter sales remains a major driver for the future. Sales at this segment rose 15% to $448 million in the third quarter of fiscal 2018, owing to better price/mix and higher volumes. Volumes gained from various limited period product offers or LTOs along with strong sales to strategic consumers. Strength in both these factors is likely to drive volume growth in this segment, throughout fiscal 2018.
Further, Lamb Weston’s top line has been gaining from its robust pricing strategy, evident from the fact that pricing drove sales across all segments in the third quarter. Notably, Lamb Weston’s sales grew on the back of a 7% rise in price/mix. This was backed by implementation of various new pricing structures related to recently renewed deals in the Global unit and in the retail unit, to an extent. Management expects new pricing structure to continue fueling Global price/mix growth in the fourth quarter. Also, overall price/mix is expected to rise in fiscal 2018,
which led to a raised sales outlook.
Management is encouraged by its solid top line performance and has raised the company’s sales outlook. Lamb Weston now expects net sales to increase at the higher end of the mid-single digit range, on the back of strong price/mix and higher volumes. This came after the company’s stellar show in the third quarter, wherein both top and bottom lines grew year over year and beat the Zacks Consensus Estimate for the sixth straight time. While earnings gained from lower tax rate, higher operating income and equity method investment earnings, sales were backed by better price mix and volumes. The solid results reflect the success of Lamb Weston’s capital expansions, strength of its commercial and supply-chain network, and focus
Can These Drivers Offset Hurdles?
However, the company’s SG&A costs rose $16 million in the third quarter due to increased labor benefits and infrastructure expenses, higher incentive compensation expenses and accelerated investments in advertising and promotions in the retail unit, as part of expansions of Grown in Idaho products. For fiscal 2018, management expects SG&A costs to be higher than what it had expected earlier, owing to the aforementioned factors. Also, it now expects interest rate to be $110 million
High raw material cost also remains a concern. Fluctuations in input prices are likely to hurt the company’s operations. In third-quarter fiscal 2018, though gross margin increased year over year, it was hit by increased transportation and warehousing expenses, input cost inflation, and higher depreciation. Management expects non-potato costs to rise in the fourth quarter and fiscal 2018, due to transportation, warehousing and commodity inflation. Also, raw potato prices are expected to rise in low to mid-single-digit range.
Nonetheless, we expect Lamb Weston’s growth drivers to offset the aforementioned headwinds and keep the company going.
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