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Lamb Weston (LW) on Track With Pricing Actions Amid High Costs

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Lamb Weston Holdings, Inc. (LW - Free Report) continues to reap benefits from an effective pricing scenario. The provider of value-added frozen potato products is focused on expanding its capacity to drive growth. However, the company is not immune to the rising cost environment.

Let’s delve deeper.

What’s Working in Lamb Weston’s Favor?

Lamb Weston’s net sales are benefiting from robust price/mix, as witnessed during the second quarter of fiscal 2024. The price/mix rose 12%, which reflects gains from inflation-induced pricing actions in business units and a positive mix. In the North America segment, price/mix increased 14% on the carryover benefit of pricing actions undertaken during fiscal 2023 and positive mix, stemming from continued gains from revenue growth management and other mix improvement efforts. In the International segment, price/mix advanced 10%.

Moreover, strategic pricing actions drove Lamb Weston’s quarterly net sales, which increased 36% year over year. Net sales, excluding buyouts, are projected to increase 6.5-8.5% in the fiscal 2024, on a low double-digit percentage points increase in price/mix.

Lamb Weston’s sturdy balance sheet and capacity to generate cash keep it well-placed to boost production capacity and fuel long-term growth. The company’s efforts to boost offerings and expand capacity enable it to meet the rising demand conditions for snacks and fries effectively.

Capital expenditures amounted to $566.5 million during the first half of fiscal 2024, owing to construction and equipment purchases as LW continues to expand its processing capacity in Idaho, Argentina and the Netherlands. In its last earnings call, management highlighted that its new greenfield processing facility in China is now operational. For the fiscal 2024, the company expects cash to be used for capital expenditures in the band of $900-$950 million.

What’s Hurting Lamb Weston?

Lamb Weston has been witnessing increased SG&A expenses for a while. In second-quarter fiscal 2024, SG&A expenses escalated by $60.2 million to $170 million. The downside can be attributed to expenses associated with bettering information systems and enterprise resource planning (ERP) infrastructure as well as higher compensation, among others.

In addition, cost inflation for key inputs like raw potatoes, grains, starches and labor are putting pressure on margins to some extent. Management expects fiscal third-quarter gross margin to be under pressure by escalated manufacturing costs, reflecting lower fixed cost coverage and other cost inefficiencies. That being said, the company’s focus on the upsides mentioned above is likely to keep aiding growth.

Other Food Stocks Battling Cost Woes

Players like Sysco Corporation (SYY - Free Report) , Flowers Foods, Inc. (FLO - Free Report) and Conagra Brands, Inc. (CAG - Free Report) have also been grappling with inflationary headwinds.

Sysco has been encountering product cost inflation for a while. In second-quarter fiscal 2024, SYY witnessed product cost inflation of 1.1%, measured by the estimated change in product costs, mainly in the meat and frozen categories. During the quarter, Sysco’s operating expenses rose 3.9% due to cost inflation and increased volumes. The persistence of these trends is a concern.

Flowers Foods is also battling hurdles due to cost inflation. In the fourth quarter of fiscal 2023, FLO’s materials, supplies, labor and other production costs (excluding depreciation and amortization) were partly impacted by elevated labor and maintenance costs. The inflationary environment may continue to pose challenges for Flowers Foods, potentially impacting consumer purchasing power and input costs, which could affect profitability.

Conagra has been encountering cost inflation, though the trend has been moderating of late. In the second quarter of fiscal 2024, CAG’s adjusted gross margin contracted 129 basis points to 26.9%, hurt by the inflated cost of goods sold to the tune of 1.7%, lower organic sales and unfavorable operating leverage. Conagra expects the net cost of goods sold inflation of nearly 3% in fiscal 2024.

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