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Lamb Weston's (LW) Retail Unit Strong, Foodservice Troubled

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Lamb Weston Holdings, Inc. (LW - Free Report) has been benefiting from strength in its retail business, courtesy of increased at-home consumption amid the pandemic. Also, a robust price/mix has been working well for the company. These upsides were witnessed in first-quarter fiscal 2021, wherein earnings beat the Zacks Consensus Estimate by a wide margin.

However, softness in the foodservice channel has been a concern owing to lower traffic in restaurants and other away-from-home locations. Also, the company has been seeing increased costs associated with COVID-19. Let’s delve deeper.

Factors Aiding Lamb Weston

Lamb Weston 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 business sales grew 19% to $153.9 million in the first quarter. Price/mix and volumes increased 8% and 11%, respectively. Volumes were backed by increased demand due to the pandemic-led higher at-home consumption.

Retail demand for branded products remained steady in the quarter. Product contribution margin improved 24% to $35.8 million on the back of increased sales volume, improved mix and reduced advertising and promotional costs. We believe that higher 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 second quarter of fiscal 2020, until the week ended Sep 25. In this regard, the company’s shipments in North America are nearly 90% of the prior-year levels, driven by demand from quick-serve restaurants and retail, along with continued recovery at full-service restaurants.

Apart from this, Lamb Weston’s top line has been benefiting from the robust price/mix. During the first quarter of fiscal 2021, price/mix rose 2% on the back of improvements in the Retail and Foodservice segments. This somewhat aided sales, which were otherwise negatively impacted by lower volumes.

Hurdles in Lamb Weston’s Path

Lamb Weston has been bearing the brunt of the adverse impact of the pandemic on traffic at restaurants and other foodservice channels. This has been denting demand in the away-from-home lines. Such challenges were witnessed in the company’s first-quarter fiscal 2021 results, wherein volumes fell 14% year over year due to a decline in demand for frozen potato products in the away-from-home channel due to restrictions on restaurants and other foodservice operations to curb the coronavirus spread.

Foodservice sales declined 22% to $236.7 million. Price/mix rose 6%, whereas volumes declined 28%. Volumes were marred by lower demand due to pandemic-led traffic declines at restaurants as well as non-commercial customers like lodging and hospitality, schools, sports and entertainment, and workplace environments, among others. Though trends in the first quarter improved sequentially with pandemic-led restrictions being lifted, demand remains below pre-pandemic levels due to social-distancing trends. These factors weighed on the company’s Global segment as well.

Additionally, high costs have been a worry for Lamb Weston. In the first quarter of fiscal 2021, increased pandemic-led costs were a deterrent in all segments. 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, and health and safety, increased transportation and warehousing expenses, and costs to retain functional support workers, among others.

Wrapping Up

Nonetheless, Lamb Weston is taking strong measures to curtail the cost structure and expand efficiencies in manufacturing as well as commercial operations. These factors along with the other abovementioned upsides are expected to help the company overcome the challenges in its path and keep its growth story going.

Shares of this Zacks Rank #3 (Hold) company have gained 14.1% in the past three months against the industry’s decline of 0.1%.

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