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Lamb Weston (LW) Gains on Solid Retail Business, High Costs Hurt

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Lamb Weston Holdings, Inc. (LW - Free Report) is well placed, courtesy of its solid price/mix as well as efforts to fuel offerings and expand capacity. Notably, the company has been gaining on a strong retail business, thanks to rising demand amid the pandemic-led increased at-home consumption. That being said, softness in the foodservice channel and high costs are keys concerns for the company.

Factors Driving 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 23% to $162.5 million in the third quarter of fiscal 2021. Price/mix advanced 10%, thanks to better mix stemming from increased sales of branded products. Volumes grew 13% on the back of robust growth in shipments of mainstream and premium brand offerings.

Further, 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. In this regard, the company’s shipments in the United States were nearly 90% of the fourth-quarter fiscal 2019 level, driven by shipments to QSR and large full-service chain restaurants, as well as to customers served by the Retail segment. Notably, shipments to customers served by the Retail segment were about 110% of the fourth-quarter fiscal 2019 level. Other food companies gaining on pandemic-led increased demand include The J.M. Smucker (SJM - Free Report) , Kellogg (K - Free Report) and Campbell Soup (CPB - Free Report) .

Lamb Weston’s top line has been benefiting from robust price/mix, as also witnessed during the third quarter of fiscal 2021. 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. This somewhat aided sales, which were otherwise negatively impacted by lower volumes. Moreover, Lamb Weston has been undertaking initiatives to boost offerings and operating capacity. In March 2021, the company unveiled plans to build a new french fry processing facility in Ulanqab, Inner Mongolia, China. Notably, this will be an addition to the company’s existing production capacity in China, which is the one in Shangdu, Inner Mongolia. Earlier, the company completed the expansion of a facility in Hermiston, OR, on Jun 18, 2019. The expansion has facilitated the addition of a new processing line for increasing the production of frozen french fries.

Hurdles on Lamb Weston’s Path

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, to name a few. This has been denting demand in the away-from-home lines. Foodservice segment sales declined 22% to $219.5 million in the third quarter, with volumes being marred by lower demand due to pandemic-led traffic declines at restaurants and non-commercial customers. Shipment and order trends witnessed improvements as the quarter progressed, backed by the impact of the relaxation of government restrictions on restaurant traffic, together with gains from a relatively mild winter. However, management on its earnings call said that shipments to non-commercial foodservice customers in the United States are likely to remain weak throughout the fourth quarter.

Additionally, high COVID-related costs have been a concern. Management expects the operating environment to remain tough due to the pandemic and to continue incurring elevated supply-chain costs in the near term. 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.

Nevertheless, the company is taking strong measures to curtail the cost structure and expand efficiencies in manufacturing as well as commercial operations. These aspects are likely to keep Lamb Weston well positioned for growth.

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