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Lamb Weston's (LW) Stock Falls 22% in 6 Months on Input Costs

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Lamb Weston Holdings, Inc. (LW - Free Report) appears to be in bad shape. The company has been struggling with high input costs, which are expected to persist. This is likely to keep the margins under pressure. Also, Lamb Weston’s slow demand recovery in some areas has been a concern. Shares of this Zacks Rank #4 (Sell) company have tumbled almost 22% in the past six months compared with the industry’s fall of 4%.

The Zacks Consensus Estimate for its fiscal 2022 bottom line has declined from $1.57 per share to $1.54 over the past 60 days. This also suggests a decline of 28.7% from the figure reported in the year-ago period.

Let’s take a closer look.

Zacks Investment ResearchImage Source: Zacks Investment Research

High Costs – a Major Concern

Lamb Weston has been witnessing escalated costs for a while now. During the first quarter of fiscal 2022, its gross profit plunged 29.2% to $151.3 million due to increased manufacturing and distribution costs on a per-pound basis. This reflected double-digit cost inflation in key inputs such as edible oils, transportation, especially trucking and ocean freight. Volatility in the labor market, partly stemming from pandemic-related absenteeism, also led to higher manufacturing costs.

SG&A expenses during the first quarter escalated 16.6% to $91.1 million due to elevated incentive compensation, allocation of benefits as well as investments to enhance the company’s information technology (IT), commercial and supply-chain operations. The rise in advertising and promotion expenses was mainly related to the launch of new products in the Retail segment.

For fiscal 2022, management expects net income and adjusted EBITDA (including unconsolidated joint ventures) to be under pressure as LW continues to navigate through emerging headwinds due to the pandemic. In this respect, Lamb Weston expects continued pressure from supply-chain volatility, labor availability and 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 the pre-pandemic levels in fiscal 2022. Also, management expects operating expenses to rise in the near term due to continued investments in supply-chain, commercial and IT operations.

Other Obstacles

Due to the spread of the Delta variant of COVID-19, demand conditions somewhat softened across Asia and Oceania during August 2021. On its first-quarter fiscal 2022 earnings call, management highlighted that the company’s volume growth during August was tempered by lower production run rates stemming from labor issues, especially at the full-service restaurants. Although Lamb Weston is gaining from the demand recovery in the away-from-home food channels, growth has remained below the pre-pandemic levels. The improvement rate has been slower in the full-service restaurants as compared with the foodservice outlets.

In the Retail segment, the company’s sales tumbled 14% to $132.5 million during the first quarter. Volumes declined 15% due to reduced shipments of private label products and a slight decline in the branded product sales volumes as food-at-home purchases began to normalize from the pre-pandemic levels. Owing to these factors and high costs, Lamb Weston’s bottom line missed the Zacks Consensus Estimate and declined year over year in the quarter.

While Lamb Weston’s efficient price/mix has been an upside, the abovementioned cost headwinds cannot be ignored.

3 Consumer Staple Picks

Some top-ranked stocks from the Consumer Staples sector are MGP Ingredients (MGPI - Free Report) , The Hain Celestial Group (HAIN - Free Report) and Inter Parfums, Inc. (IPAR - Free Report) .

MGP Ingredients, the producer and supplier of distilled spirits and specialty wheat proteins and starch food ingredients, currently sports a Zacks Rank #1 (Strong Buy). Shares of the company have rallied 38.9% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for MGP Ingredients’ current financial-year sales and earnings per share (EPS) suggests growth of 55.5% and 61.4%, respectively, from the year-ago period’s figures. MGPI has a trailing four-quarter earnings surprise of 117.6%, on average.

Inter Parfums develops, manufactures and distributes prestige perfumes and cosmetics. It currently sports a Zacks Rank #1. Inter Parfums has a trailing four-quarter earnings surprise of 29.7%, on average.

The Zacks Consensus Estimate for IPAR’s current financial-year sales and EPS suggests growth of 55.9% and 100%, respectively, from the year-ago period’s figures. Shares of the company have surged 35% in the past six months.

The Hain Celestial, which provides various natural and organic foods as well as personal care products in North America and Europe, carries a Zacks Rank #2 (Buy) at present. It has a trailing four-quarter earnings surprise of 9.7%, on average. Shares of The Hain Celestial have moved up 3.8% in the past six months.

The Zacks Consensus Estimate for HAlN’s current financial-year EPS suggests growth of 14.5% from the year-ago period’s reported number.