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Will Lamb Weston (LW) Overcome Cost Hurdles in Q1 Earnings?

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Lamb Weston Holdings, Inc. (LW - Free Report) is scheduled to release first-quarter fiscal 2019 results on Oct 2. This global manufacturer, marketer and distributor of value-added frozen potato products boasts a splendid earnings surprise history and has outperformed the Zacks Consensus Estimate by an average of 8.6% in the trailing four quarters.

Factors Likely to Drive Lamb Weston

We expect Lamb Weston to gain from strength in its Global segment and robust price/mix. Notably, the company’s Global segment accounted for nearly half of its fourth-quarter sales and is a major driver for the future. Sales at this unit gained from better price/mix and higher volumes. While volumes were backed by strong sales to strategic consumers in North America, price/mix was fuelled by better pricing, and favorable customer and product mix. Strong pricing at this segment is expected to remain a tailwind to Lamb Weston’s sales growth in fiscal 2019. In fact, price/mix remained robust at all segments in the fourth quarter, and overall price/mix is expected to augment sales growth in fiscal 2019.

Moreover, the company is poised to benefit from its limited time offers or LTO innovations, which are key to Lamb Weston’s long-term prospects. Incidentally, LTOs helped drive growth and market share gains in fiscal 2018. In the Global segment particularly, LTOs accounted for significant volume growth. Driven by such factors, Lamb Weston delivered robust fourth-quarter fiscal 2018 results, wherein both the top and the bottom lines grew year over year and beat the Zacks Consensus Estimate for the seventh straight time. Markedly, both earnings and sales have been delivering positive surprise, ever since the company’s spin-off from Conagra Brands (CAG - Free Report) that was concluded in November 2016.

Will Cost Hurdles be Offset?

However, Lamb Weston’s SG&A expenses increased almost 32% to $99.2 million in fourth quarter of fiscal 2018. This was a result of elevated labor and infrastructure costs associated with operating as a stand-alone company. Also, higher advertising and promotional investments along with greater incentive compensation costs led to the upside.  For fiscal 2019, management expects SG&A costs to increase due to planned investments undertaken to support upgrade of information systems and enterprise resource planning infrastructure. Also, increased SG&A cost expectations include the company’s plans to invest more toward enhancing innovations, sales, marketing and other functional capabilities, in order to augment operating efficiencies and fuel growth. These factors may hit the bottom line.

Further, input cost inflation is a hurdle for Lamb Weston, whose main raw materials include potatoes, edible oils, energy and packaging. Fluctuations in input prices are likely to hurt the company’s operations. In fourth-quarter fiscal 2018, though gross margin increased year over year, it was hit by increased transportation and warehousing expenses, input cost inflation, and higher depreciation. Management expects higher production cost inflation in fiscal 2019, which is likely to limit gross margin expansion. Incidentally, total production cost per pound is expected to rise mid-single digit in fiscal 2019. Notably, many other food companies like General Mills (GIS - Free Report) and Campbell Soup (CPB - Free Report) are also battling input cost inflation.

Coming back to Lamb Weston, though cost projections for fiscal 2019 make us somewhat cautious regarding the first quarter performance, the company remains focused on countering its cost hurdles through capacity expansion and efforts to drive sales. Markedly, management remains encouraged about witnessing another year of sales and earnings growth in fiscal 2019.  Further, the company expects the operating environment to remain favorable in fiscal 2019, wherein it also expects continued robust global demand growth for frozen potato products. Also, Lamb Weston expects processing capacity utilization levels in North America to be strong. All said, management anticipates net sales to increase mid-single digits on the back of strong price/mix in the first half of fiscal 2019. Clearly, these factors give out positive signals for the quarter to be reported.  

What to Expect in Q1?

The Zacks Consensus Estimate for sales is pegged at $879 million, up 7.5% from the year-ago reported figure. Further, the consensus mark for earnings has remained stable over the past 30 days at 68 cents, which shows a 19.3% jump from 57 cents recorded in the year-ago period.

What Does the Zacks Model Unveil?

However, our proven model doesn’t show that Lamb Weston is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Lamb Weston carries a Zacks Rank #4 (Sell), which along with an Earnings ESP of 0.00%, makes surprise prediction difficult.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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