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Lamb Weston (LW) Q2 Earnings Top Estimates, Sales Rise Y/Y

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

Quarter in Detail

The company’s bottom line came in at 50 cents per share came, which surpassed the Zacks Consensus Estimate of 33 cents. Earnings declined 24% from 66 cents reported in the prior-year quarter.

Net sales amounted to $1,007 million, up 12% year on year. The top line surpassed the Zacks Consensus Estimate of $1,001.8 million. Volume and price/mix increased 6% each. Sales volumes benefited from the ongoing recovery in demand for frozen potato products in its restaurant and foodservice channels across North America. Price/mix increased on the back of initial benefits from product pricing actions along with better prices charged to customers for product delivery.

Lamb Weston Price, Consensus and EPS Surprise

 

Lamb Weston Price, Consensus and EPS Surprise

Lamb Weston price-consensus-eps-surprise-chart | Lamb Weston Quote

 

Gross profit declined $18 million to $205.5 million, as gains from higher sales volumes and favorable price/mix were more than countered by increased manufacturing and distribution costs on a per-pound basis. Increased costs per pound reflects double-digit cost inflation from key inputs, mainly edible oils, ingredients like grains and starches, transportation and packaging. Adverse impacts from labor shortages on production run-rates and reduced raw potato utilization rates also led to an increase in costs per pound. Such cost increases were somewhat offset by supply chain productivity savings.

SG&A expenses increased $7.2 million to $91.1 million due to higher advertising and promotion expenses, sales commissions related to higher sales volumes as well as expenses mainly associated with employee recruiting and retention. These were somewhat offset by some reduced consulting expenses andlower expenses for the company’s new enterprise resource planning system.

Adjusted EBITDA (including unconsolidated joint ventures) declined $32.3 million to $180.9 million, due to lower income from operations and equity method investment earnings

Segment Analysis

Sales in the Global segment increased 9% to $516.7 million. Volumes rose 4% and price/mix increased 5%. Price/mix reflects gains from pricing actions, including increased prices charged for freight. Sales volumes benefited from solid growth in shipments to restaurant chain customers across the United States. Product contribution margin in the segment declined 13% to $80.9 million.

Foodservice sales soared 30% to $313.9 million. Volumes and Price/mix increased 22% and 8%, respectively. Sales volumes were driven by solid demand 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 19% to reach $104.4 million.

In the Retail segment, sales inched up 1% to $142.6 million. Price/mix advanced 5% but volumes declined 4%. Price/mix mainly benefited from favorable prices in the branded portfolio, including higher prices charged for freight and better mix. Sales volume was affected by reduced shipments of private label products. This was somewhat offset by higher branded product sales volumes. Product contribution margin slumped 29% to $21.4 million.

Other Financial Details

Lamb Weston ended the quarter with cash and cash equivalents of $621.9 million, long-term debt and financing obligations (excluding current portion) of $2,692.1 million and total shareholders’ equity of $365.2 million. The company generated $207.5 million as net cash from operating activities for the 26 weeks ended Nov 28, 2021. Capital expenditures (including IT expenditure) amounted to $148.1 million. For fiscal 2022, the company expects cash used for capital expenditures (excluding buyouts) to be nearly $450 million.

During the second quarter, management paid out dividends worth $34.3 million and bought back shares worth $50 million, thereby returning $84.3 million to its shareholders. Lamb Weston has shares worth $344 million remaining under its updated share buyback plans.

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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 half of fiscal 2022, the company expects net sales growth to be mainly driven by price/mix. It continues to reap benefits from strong demand for frozen potato products globally. That being said, growth in sales volumes might be hampered by the disruptions in production and logistics networks along with impacts from COVID-19 variants on restaurant traffic and consumer demand.

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 major inflation for key production inputs, transportation and packaging when compared with fiscal 2021 levels. Also, industry-wide operational challenges like labor shortages, upstream and downstream supply chain disruptions might be a cause of concern. It also expects raw potato costs on a per pound basis to increase through the year.

As a result, management anticipates fiscal 2022 gross margin in the range of 18-20% percent, down 600-700 basis points (bps) when compared with a pre-pandemic gross margin of 25%-26%. Earlier, the company had anticipated the metric to come in the range of 17- 21%, down 500- 800 bps from the pre-pandemic gross margin.

Apart from these, management expects operating expenses to rise in the back half of fiscal 2022 due to continued investments in information technology. These investments are, however, likely to boost long-term growth and margin enhancement.

Shares of the Zacks Rank #4 (Sell) company have declined 21% in the past six months compared with the industry’s fall of 0.8%.

Hot Consumer Staples Bets

Some better-ranked stocks are Flower Foods (FLO - Free Report) , United Natural Foods (UNFI - Free Report) and Medifast (MED - Free Report) .

Flower Foods, the producer of packaged bakery foods in the United States, currently sports a Zacks Rank #1 (Strong Buy). Shares of FLO have increased 16.4% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Flower Foods’ 2022 sales suggests growth of 1.9% from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of 15.4%, on average.

United Natural Foods, the leading distributor of natural, organic and specialty food and non-food products in the United States and Canada, carries a Zacks Rank #2 (Buy) at present. Shares of UNFI have moved up 33.4% in the past six months.

The Zacks Consensus Estimate for United Natural Foods’ current financial year earnings per share suggests growth of 7.7% from the year-ago reported number. UNFI has a trailing four-quarter earnings surprise of 35.4%, on average.

Medifast, the manufacturer of healthy living products and other consumable health and nutritional products, currently carries a Zacks Rank of 2. Shares of MED have lost 26.6% in the past six months.

The Zacks Consensus Estimate for Medifast’s2022 sales suggests growth of 10% from the year-ago reported figure. MED has a trailing four-quarter earnings surprise of 17.3%, on average.

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