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Lamb Weston (LW) Gains on Pricing Action & Expansion Efforts

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Focus on undertaking effective pricing efforts is favoring Lamb Weston Holdings, Inc. (LW - Free Report) . The company’s strategic growth efforts, including boosting offerings and expanding capacity, bode well. However, Lamb Weston is not immune to the inflationary environment.

Let’s delve deeper.

What’s Working Well for Lamb Weston?

Lamb Weston’s top line has been benefiting from robust price/mix, witnessed during the first quarter of fiscal 2023. The price/mix increased 19%, reflecting gains from pricing actions in the company’s core business segments to counter input, manufacturing and transportation cost inflation. In its last earnings call, management highlighted that it expects to keep realizing the carryover benefit of product pricing actions in the Foodservice and Retail segments during fiscal 2023. In the Global segment, it expects to witness the benefit of pricing actions which includes pricing structures for contract renewals.

Lamb Weston’s sturdy balance sheet and capacity to generate cash keep it well-placed to boost production capacity and fuel long-term growth. For 13 weeks ended Aug 28, 2022, capital expenditures (including IT expenditures) amounted to $121.2 million, as it continues to develop new French fry lines in Idaho and China.

In September 2022, Lamb Weston unveiled expansion plans for french fry processing capacity in Argentina with the construction of a new manufacturing unit in Mar del Plata, Buenos Aires. In July 2021, the company announced the expansion plan for french fry processing capacity at its existing American Falls, ID facility — with an envisioned capacity 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. Lamb Weston’s efforts to boost offerings and expand capacity enable the company to meet rising demand conditions for snacks and fries.

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Apart from the abovementioned capacity-expansion endeavors, the company (in October 2022) signed an agreement to buy the remaining equity interests in its European joint venture with Meijer Frozen Foods B.V. The acquisition is in sync with LW’s capital allocation and acquisition framework. The move will solidify Lamb Weston’s manufacturing footprint to better serve its customers and tap into growth opportunities across Europe, the Middle East and Africa. The company (in Jul 2022) bought an additional 40% stake in Lamb Weston Alimentos Modernos S.A. ("LWAMSA") — which is its joint venture in Argentina — taking its total ownership to 90%.

Cost Hurdles on Way

Although Lamb Weston’s first-quarter fiscal 2023 gross profit increased year over year, the metric was hurt by escalated costs. 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.

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. Moreover, Lamb Weston expects SG&A expenses in the band of $475-$500 million in fiscal 2023, indicating greater investments to upgrade information systems and enterprise resource planning infrastructure, together with escalated compensation and benefit costs.

We believe that the aforementioned upsides will likely help the Zacks Rank #3 (Hold) company stay afloat amid such hurdles. LW’s stock has gained 32.3% in the past six months compared with the industry’s 13.4% growth.

3 Solid Staple Picks

Some top-ranked stocks are The Chef's Warehouse (CHEF - Free Report) , Conagra Brands (CAG - Free Report) and The J. M. Smucker Company (SJM - Free Report) .

The Chef's Warehouse, which distributes specialty food products, currently sports a Zacks Rank #1 (Strong Buy). Chef's Warehouse has a trailing four-quarter earnings surprise of 93.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for CHEF’s current financial year sales suggests growth of 46.5% from the year-ago reported number, while earnings indicate significant growth.

Conagra Brands, operating as a consumer-packaged goods food company, currently carries a Zacks Rank of 2 (Buy). CAG has a trailing four-quarter earnings surprise of 1.8%, on average.

The Zacks Consensus Estimate for Conagra Brands’ current financial year sales and earnings suggests growth of 5.2% and 3.4%, respectively, from the corresponding year-ago reported figures.

The J. M. Smucker, which manufactures and markets branded food and beverage products, currently carries a Zacks Rank of 2. SJM has a trailing four-quarter earnings surprise of 18.5%, on average.

The Zacks Consensus Estimate for The J. M. Smucker’s current financial-year sales suggests growth of 5.6% from the year-ago reported figure.

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