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Lamb Weston (LW) Troubled by High Costs, Supply-Chain Woes

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Lamb Weston Holdings, Inc. (LW - Free Report) appears to be in troubled waters. The company is encountering significant input and transportation cost inflation along with supply-chain disruptions. On its fourth-quarter fiscal 2021 earnings call, management stated that the net income and adjusted EBITDA (including unconsolidated joint ventures) are likely to be under pressure in the first half of fiscal 2022. Apart from this, the company’s Retail segment is seeing tough comparisons with the year-ago period’s pandemic-induced demand surge.

The Zacks Consensus Estimate for the fiscal 2022 bottom line has declined from $2.55 to $2.51 per share over the past 30 days. Shares of the Zacks Rank #5 (Strong Sell) company have depreciated 24.4% in the past three months compared with the industry’s 7.3% fall.

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

Escalated Costs – Key Hurdle

The company has been seeing escalated costs for a while now. In the fourth quarter of fiscal 2021, the SG&A expenses escalated to $18.9 million due to elevated incentive compensation accruals and investments to enhance the company’s manufacturing, commercial and supply-chain operations. Also, a rise in advertising and promotion expenses led to this upside. Apart from this, lingering impacts of the pandemic and the sudden recovery of the broader U.S. economy hurt the overall supply chain of the industry. Supply-chain disruptions, significant input and transportation cost inflation, and a tough labor market are likely to put pressure on the company’s earnings in the near term.

Management expects supply-chain volatility, as well as considerable cost inflation of key production inputs, packaging and transportation from the year-ago period. Apart from these, management expects operating expenses to see pressure in the near term from continued investments in supply-chain, commercial and manufacturing operations. That said, Lamb Weston anticipates earnings to slowly normalize in the second half of fiscal 2022, as it expects stabilized manufacturing and distribution and a better price/mix.

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Other Headwinds

Lamb Weston’s Retail segment sales tumbled 28% to $146.3 million during the fiscal fourth quarter. On excluding the impact of an additional week in the year-ago period, net sales and volumes were down 22% and 24%. Tough comparisons with the year-ago period’s demand surge due to the increased at-home consumption of frozen potato products, together with the reduced shipments of private-label products, affected sales volume growth. Total shipments during the reported quarter, however, remained close to the pre-pandemic levels on the back of continued demand strength for the company’s premium and mainstream branded offerings.

On its last earnings call, management stated that although demand improved in Europe and in the core international markets, the rate of recovery has been volatile and lower than that in the United States. This is due to the slower rate and availability of vaccine, along with the curbs being reimposed and the lifting of bans being delayed resulting from the new wave of the virus. On the whole, Lamb Weston anticipates the recovery pace outside the United States to fluctuate. Recovery in emerging markets (including Asia, Latin America and the Middle East) is likely to be more volatile and time taking.

Wrapping Up

Lamb Weston is benefiting from the rebound in the away-from-home frozen potato product demand as well as its impressive price/mix. Management remains encouraged about the recovering restaurant traffic in the United States, particularly at the full-service restaurants. However, it is yet to be seen if these upsides can help the company completely offset the above-mentioned barriers.

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