Lamb Weston Holdings, Inc. (LW Quick QuoteLW - Free Report) posted first-quarter fiscal 2022 results, with the top and the bottom line missing the Zacks Consensus Estimate. Sales improved year on year, while earnings reflected a decline.  

While the company gained from recovery in away-from-home frozen potato products demand, declines in the retail channel were a drag. The company’s retail channel was affected by normalization of food-at-home purchases compared with pre-pandemic levels. Higher manufacturing and distribution costs, including cost inflation across key product inputs and transportation, as well as labor market headwinds adversely impacted the company’s gross profit.

Management is optimistic about the recovery in the frozen potato category. However, impacts of adverse weather conditions along with pandemic-led industry wide challenges are likely to keep adding to the company’s cost burden, as the year progresses. Nevertheless, the company is undertaking prudent measures to mitigate the impacts of high costs and other supply chain headwinds.

Quarter in Detail

The company’s bottom line came in at 20 cents per share came, which missed the Zacks Consensus Estimate of 38 cents. Earnings declined 67% from 61 cents reported in the prior-year quarter.

Net sales amounted to $984.2 million, which advanced 13% year on year. The top line missed the Zacks Consensus Estimate of $999 million. Volumes rose 11% year over year, while price/mix went up 2%. Sales volumes were backed by a rebound in the away-from-home frozen potato products demand, with pandemic-led curbs on restaurants and other foodservice locations being lifted. This more than offset the volume decline in retail channel, which resulted from normalization of food-at-home purchases compared with the pre-pandemic levels. Price/mix were backed by higher prices charged from customers and favorable mix in all core segments.

Gross profit plunged 29.2% to $151.3 million, as gains from higher sales volumes were offset by increased manufacturing and distribution costs on a per-pound basis. This reflects on double-digit cost inflation in key inputs such as edible oils as well as transportation, especially trucking and ocean freight. Volatility in the labor market were also a drag

SG&A expenses escalated 16.6% to $91.1 million due to elevated incentive compensation and benefits as well as investments to enhance the company’s information technology, commercial and supply-chain operations. Rise in advertising and promotion expenses were mainly related to the launch of new products in the Retail segment.

Adjusted EBITDA (including unconsolidated joint ventures) declined 39% to $123.4 million, due to lower income from operations and equity method investment earnings

Segment Analysis

Sales in the Global segment increased 12% to $501.2 million. Volumes rose 10% and price/mix increased 2%. Sales volume was mainly backed by demand recovery in the United States, gains across key international markets as well as the benefits from limited time product offerings. Product contribution margin in the segment declined 45% to $42.6 million.

Foodservice sales soared 36% to $321.4 million. Volumes and Price/mix increased 35% and 1%, respectively. Sales volumes were driven by a demand revival at small and regional chain restaurants, combined with independently-owned restaurants. Shipments to non-commercial customers like lodging and hospitality, schools and universities, sports and entertainment, healthcare as well as workplace environments improved year over year, though it remained below pre-pandemic levels. Product contribution margin increased 12% to reach $96.4 million.

In the Retail segment, sales tumbled 14% to $132.5 million. Price/mix advanced 1% but volumes declined 15%. Sales volume were affected by reduced shipments of private label products and a slight decline in product sales volumes as food-at-home purchases began to normalize from the pre-pandemic levels. Product contribution margin slumped 59% to $14.8 million.

Other Financial Details

Lamb Weston ended the quarter with cash and cash equivalents of $789.7 million, long-term debt and financing obligations (excluding current portion) of $2,698.6 million and total shareholders’ equity of $427.4 million. The company generated $161.8 million as net cash from operating activities for the 13 weeks ended Aug 29, 2021. Capital expenditures (including IT expenditure) amounted to $78.9 million. For fiscal 2022, the company expects cash used for capital expenditures (excluding buyouts) to be nearly $450 million.

On Aug 11, 2021, the company amended its revolving credit facility to increase the capacity to $1 billion and extend the maturity date till Aug 11, 2026.

During the first quarter, management paid out dividends worth $34.4 million and bought back shares worth $26 million, thereby returning $60.4 million to its shareholders. Lamb Weston has shares worth $144 million remaining under its current authorization of $250 million.

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Guidance

For fiscal 2022, management expects net sales growth to exceed its long-term goal of low-to-mid single digits. For the second quarter, the company continues to expect net sales growth to be driven by higher volume, reflecting recovery in demand for frozen potato products as well as favorable comparison from the prior year quarter’s soft shipments. It continues to expect net sales growth in the second half of the year to project a balance of elevated volumes and better price/mix, as the company’s recent pricing actions are fully implemented.

Net income and adjusted EBITDA (including unconsolidated joint ventures) are likely to be under pressure for the rest of fiscal 2022, as it continues to navigate through the impacts of the pandemic. In this respect the company has been grappling with supply-chain volatility, labor availability as well as considerable cost inflation of key production inputs, packaging and transportation. It also expects potato costs to rise on a per-pound basis due to adverse weather conditions in the Pacific Northwest. As a result, gross margin is anticipated to remain below pre-pandemic levels in fiscal 2022. Management previously expected earnings to slowly normalize and reach the pre-pandemic levels, in the second half of fiscal 2022.

Apart from these, management expects operating expenses to rise in the near term due to continued investments in supply-chain, commercial and information technology operations. These investments are, however, likely to boost long-term growth and margin enhancement.

Shares of the Zacks Rank #4 (Sell) company have declined 27.3% in the past three months compared with the industry’s fall of 2.7%.

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