Back to top

Image: Bigstock

Lamb Weston (LW) Poised on Pricing & Expansion Efforts

Read MoreHide Full Article

Robust recovery in the Foodservice business and effective pricing actions are working favorably for Lamb Weston Holdings, Inc. (LW - Free Report) . The provider of value-added frozen potato products’ efforts to boost offerings and expand capacity are yielding. However, the company is not immune to supply-chain volatility and an inflationary environment.

Let’s delve deeper.

Zacks Investment Research
Image Source: Zacks Investment Research

What’s Working Well for Lamb Weston?

Lamb Weston is benefiting from a recovery in the Foodservice business. The trend persisted in the third quarter of fiscal 2022, with Foodservice sales soaring 34% to $294.5 million. Volumes and Price/mix increased by 22% and 12%, respectively in the unit. Price/mix benefited from the favorable mix and product and freight pricing actions to counter inflation. Volumes benefited from the continued rebound in demand at full-service restaurants and non-commercial channels, like lodging and hospitality, healthcare, schools and universities, sports and entertainment and workplace environments.

During third-quarter fiscal 2022, Lamb Weston’s price/mix increased 12%, mainly reflecting gains from pricing actions in the company’s business segments to counter input, manufacturing and transportation cost inflation. Price/mix increased 8% in the Global segment, reflecting a favorable mix and domestic and international product and freight pricing actions to counter inflation. In the Retail segment, Price/mix advanced 12%, driven by product and freight pricing actions across the branded and private label portfolios and a favorable mix. For fiscal 2022, management expects net sales growth to exceed its long-term goal of low-to-mid single digits. The company expects fourth-quarter fiscal 2022 net sales growth to be fueled by price/mix, indicating its pricing actions to counter input and transportation cost inflation.

Lamb Weston’s sturdy balance sheet and capacity to generate cash keep it well placed to boost production capacity and long-term growth. In July 2021, the company announced the expansion plan of french fry processing capacity at its existing American Falls, ID facility – with an envisioned ability to manufacture more than 350 million pounds of frozen french fries and other potato products annually. In March 2021, the company unveiled plans to build a new french fry processing facility in Ulanqab, Inner Mongolia, China. In the last earnings call, the company highlighted that it is on track with capacity expansion investments across Idaho and China, which will keep it well-positioned to support rising customer demand in the long term. In an earlier development, Lamb Weston completed the expansion of a facility located at Hermiston, OR, on Jun 18, 2019. The expansion facilitated the addition of a new processing line for increasing the production of frozen french fries.

Is All Rosy for Lamb Weston?

Although Lamb Weston’s third-quarter fiscal 2022 gross profit slightly increased year over year, the metric was hurt by escalated costs. Escalated manufacturing and distribution costs on a per-pound basis and reduced sales volumes were a concern for the metric. In its last earnings call, management highlighted that net income and adjusted EBITDA (including unconsolidated joint ventures) would likely be under pressure in the fourth quarter of fiscal 2022. The company continues to navigate through major inflation for key production inputs, transportation and packaging. Also, industry-wide operational challenges like labor and commodity shortages might be a concern. For the fourth quarter of fiscal 2022, the company expects sales volumes to be tempered by production and logistics network disruptions. Also, the unfavorable impact of inflation and COVID variants on restaurant traffic and consumer demand is likely to put pressure on the volumes.

That said, focus on the aforementioned upsides is likely to help LW stay afloat amid such hurdles. Shares of the Zacks Rank #3 (Hold) company have gained 20.3% in the past three months against the industry’s 2.1% decline.

Top 3 Food Bets

Some better-ranked stocks are Sysco Corporation (SYY - Free Report) , United Natural Foods (UNFI - Free Report) and Pilgrim’s Pride (PPC - Free Report) .

Sysco, which engages in marketing and distributing various food and related products, sports a Zacks Rank #1 (Strong Buy). SYY has a trailing four-quarter earnings surprise of 9.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Sysco’s current financial year sales and earnings per share (EPS) suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.

United Natural Foods distributes natural, organic, specialty, produce and conventional grocery and non-food products. UNFI currently sports a Zacks Rank #1.

The Zacks Consensus Estimate for UNFI’s current financial year sales and EPS suggests growth of 7.2% and 4.9%, respectively, from the year-ago period’s reported figures. United Natural Foods has a trailing four-quarter earnings surprise of 29.9%, on average.

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, carries a Zacks Rank #2 (Buy). PPC has a trailing four-quarter earnings surprise of 31.4%, on average.

The Zacks Consensus Estimate for Pilgrim’s Pride’s current financial year EPS suggests growth of 63.2% from the year-ago reported number.