Lamb Weston Holdings, Inc. (LW Quick QuoteLW - Free Report) posted first-quarter fiscal 2023 results, wherein the bottom line increased year over year and surpassed the Zacks Consensus Estimate. The top line grew year over year but missed the consensus mark. Management reaffirmed fiscal 2023 outlook.

Results benefited from pricing actions across all business segments as well as manufacturing cost-savings undertaken to mitigate inflation. That said, it saw soft volumes in the quarter on drab restaurant traffic trends and supply chain hurdles affecting production run-rates across its plants.

Quarter in Detail

LW’s bottom line came in at 75 cents per share, which surpassed the Zacks Consensus Estimate of 52 cents. Earnings surged 317% year over year. The upside can be contributed to higher income from operations.

Net sales amounted to $1,125.6 million, up 14% year over year. The price/mix increased 19%, reflecting gains from pricing actions in the company’s core business segments undertaken to counter input, manufacturing and transportation cost inflation. Volumes fell 5% mainly due to lower casual dining and full-service restaurant traffic in the United States. In addition, the timing of shipments to large chain restaurant customers was a headwind. Lamb Weston’s shipments into foodservice and retail channels across the United States continued to be adversely impacted by its inability to fully serve customer demand stemming from widespread industry supply chain restrictions, like labor and commodities shortages. The top line missed the Zacks Consensus Estimate of $1,141.3 million.

Gross profit came in at $273.3 million, up $122 million, driven by the favorable price/mix and productivity initiatives. Increased manufacturing and distribution costs on a per pound basis and reduced sales volumes were a concern for the metric.The higher costs per pound mainly reflect double-digit cost inflation for key inputs like edible oils, ingredients namely grains and starches utilized for product coatings, labor costs and transportation expenses. Higher costs per pound also reflect increased costs related to the impact of extreme summer heat, which adversely impacted the yield and quality of potato crops in the Pacific Northwest during the fall of 2021. In addition, impacts from labor and commodities shortages on production run-rates were headwinds.

SG&A expenses escalated by $25.2 million to $116.3 million mainly due to increased compensation and benefits expense and greater expenses associated with improving its information and technology services infrastructure.

Adjusted EBITDA (including unconsolidated joint ventures) jumped 92% to $227.8 million, courtesy of increased income from operations.

Segment Analysis

Sales in the Global segment increased 12% to $559.7 million. Volumes fell 2% while price/mix increased 14%. The price/mix benefited fromthe positive mix as well as domestic and international product and freight pricing actions undertaken to counter inflation.The timing of shipments to large QSR chain customers across the United States led to a decline in volumes. The product contribution margin in the segment jumped 96% to $83.7 million.

Foodservice sales increased 14% to $366.3 million. Volumes decreased 12%, and the price/mix jumped 26%. Favorable price/mix reflects carryover gains of product and freight pricing actions to mitigate inflation. The company witnessed soft demand in the segment’s restaurant and non-commercial channels, including lodging and hospitality, healthcare, schools and universities among others. It also saw lower restaurant traffic stemming from inflationary pressures on consumer discretionary spending. The product contribution margin increased 43% to reach $138.2 million.

In the Retail segment, sales went up 28% to $169.6 million. The price/mix advanced 32%, but volumes declined 4%. The price/mix benefited from the carryover impact of pricing actions in the branded and private label portfolios undertaken to counter inflation. The lower shipments of private label products hurt the sales volume. The product contribution margin surged 229% to $48.7 million.

Other Financial Details

Lamb Weston ended the quarter with cash and cash equivalents of $485.3 million, long-term debt and financing obligations (excluding the current portion) of $2,700.1 million and total shareholders’ equity of $510 million. The company generated $192.1 million as net cash from operating activities for the 13 weeks ended Aug 28, 2022. Capital expenditures (including IT expenditure) amounted to $121.2 million during this time. For fiscal 2023, the company expects cash used for capital expenditures in the band of $475-$525 million.

During the reported quarter, management paid out dividends worth $35.3 million and bought back shares worth $28.4 million, thereby returning $63.7 million to its shareholders.

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Guidance

For fiscal 2023, management expects net sales growth in the band of $4.7-$4.8 billion. Net sales growth is likely to be backed by pricing actions to counter the significant input and transportation cost inflation. Also, an improved mix is likely to drive growth.

Lamb Weston expects SG&A expenses in the band of $475-$500 million, indicating greater investments to upgrade information systems and enterprise resource planning infrastructure, together with escalated compensation and benefit costs. Adjusted EBITDA (including unconsolidated joint ventures) is likely to come in the range of $840-$910 million. Adjusted net income is anticipated in the range of $360-$410 million. Adjusted diluted earnings per share (EPS) are envisioned in the band of $2.45-$2.85.

Management expects interest expenses of approximately $115 million for fiscal 2023 and an effective tax rate of nearly 24%. Further, it anticipates depreciation and amortization expenses of roughly $210 million.

Management expects the gross margin to remain under pressure in the first half of fiscal 2023 due to considerable inflation for key production inputs, transportation and packaging, and rising raw potato costs on a per-pound basis. The gross margin is also likely to bear the adverse impacts of supply-chain hurdles, resulting in operational bottlenecks like labor and commodities shortages. That said, the gross margin is expected to improve and reach normalized annual levels of 25-26% in the second half of the fiscal.

Shares of this Zacks Rank #2 (Buy) company have gained 7.3% in the past three months against the industry’s decline of 6.3%.

Other Stocks to Consider

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The Zacks Consensus Estimate for Lancaster Colony’s current financial year sales and EPS suggests growth of 9.6% and 38.3%, respectively, from the corresponding year-ago reported figures.

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The Zacks Consensus Estimate for Hershey’s sales and EPS for the current financial year suggests respective growth of 13.9% and 14.4% from the year-ago reported figures.

J. M. Smucker, which manufactures and markets branded food and beverage products, carries a Zacks Rank #2. J. M. Smucker delivered a trailing four-quarter earnings surprise of 20.8%, on average.

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