A month has gone by since the last earnings report for Lamb Weston (LW - Free Report) . Shares have added about 8.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Lamb Weston due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Lamb Weston Q1 Earnings & Sales Top Estimates
Lamb Weston Holdings delivered stellar first-quarter fiscal 2019 results. Quarterly adjusted earnings of 73 cents crushed the Zacks Consensus Estimate of 68 cents and surged 28% year over year. This includes a benefit of about 10 cents from lower tax rate, stemming from the recent tax reforms. Also, bottom-line growth was backed by higher operating income. Notably, effective tax rate was 23.5% this quarter, down from 33.3% in the same period last year.
Net sales advanced 12% to almost $915 million, which also surpassed the consensus mark of $879 million. The top line was fueled by improved price/mix, owing to pricing strategies, better products and customer mix. Moreover, volumes grew 4%, courtesy of strength noted across the Global and Retail segments.
Gross profit increased nearly 17.5% to $230.6 million, as improved price mix, greater volumes and supply-chain efficiency savings compensated for increased transportation and warehousing expenses, input and production cost inflation, and increased depreciation costs related to the company’s new french fry production line in Richard.
SG&A expenses increased almost 33% to $78 million on account of higher incentive compensation costs, and escalated advertising and promotional investments. This can also be attributed to increased IT and infrastructure related costs, and greater sales and marketing investments.
Adjusted EBITDA (including unconsolidated JVs) jumped 11% to $212.9 million, driven by higher operating income.
Sales at the Global segment jumped 13% to $466.8 million, thanks to better price/mix and higher volumes. Volumes increased due to strong sales to strategic consumers in the United States and core international regions, and gains from limited time product offerings (or LTOs). Price/mix was fueled by ongoing impacts of pricing actions undertaken last year, and favorable customer and product mix. Product contribution margin at the segment increased 27% to $94.5 million.
Foodservice sales jumped 7% to $297.8 million on the back of improved price/mix (driven by same factors as the Global segment). However, volumes dipped nominally. Product contribution margin jumped 12% to $102 million.
At the Retail segment, sales soared 26% to $116.2 million. Volumes at the segment surged, owing to solid distribution gains of Grown in Idaho, among other branded products. Further, price/mix improved, courtesy of increased prices across private label and branded portfolios, and better mix. Product contribution margin was up 38% at $22.7 million.
Other Financial Details
The company ended the quarter with cash and cash equivalents of $150.5 million, long-term debt (excluding current portion) of $2,329.5 million and total shareholders’ deficit of $245.4 million.
The company generated $227.9 million as net cash from operating activities during the first quarter. Also, capital expenditures for the quarter totaled roughly $90 million, which included allocations made to the construction of Lamb Weston’s new production line in Hermiston, OR.
Further, the company paid out dividends worth $28 million during the first quarter.
During the quarter, adjusted equity method investment earnings from unconsolidated joint ventures in the United States and Europe increased nearly $3 million on the back of strong operating results in Europe. This, in turn, was a result of greater volumes and reduced production costs, somewhat countered by unfavorable price/mix.
Management is pleased with its first-quarter results, which reflected improved sales and product contribution margins at all core segments. Lamb Weston is focused on its strategic growth initiatives by making constant investments in enhancing capacity, improving customer services, undertaking innovations and boosting limited time offerings. Further, the company expects the operating environment to remain favorable in the remainder of fiscal 2019. It also expects continued robust demand for frozen potato products and a tight production capacity in the fiscal year.
However, management anticipates to face hurdles like a poor potato crop at its European joint venture — Lamb Weston/Meijer. Nonetheless, the company expects to offset these challenges with Lamb Weston/Meijer’s solid pricing and cost-saving initiatives as well as solid opportunities in its North American and export ventures. All said, the company remains well positioned to achieve its fiscal 2019 goals, evident from management’s reiterated outlook.
In fiscal 2019, management expects net sales to increase mid-single digits on the back of strong price/mix in the first half.
Adjusted EBITDA (including unconsolidated joint ventures) is expected to be $860-$870 million. While gross margin is expected to at least be in line with net sales, SG&A expenses are anticipated to rise considerably. SG&A expenses are likely to increase due to planned investments undertaken to support upgrade of information systems and enterprise resource planning infrastructure. Also, the company plans to invest more toward enhancing innovations, sales, marketing and other functional capabilities, in order to augment operating efficiencies and fuel growth.
Interest costs are projected to be $110 million, while total depreciation and amortization costs are expected to be around $150 million. Management projects adjusted effective tax rate to be nearly 24%, while it plans to use cash of $360 million for capital expenditures.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Lamb Weston has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Lamb Weston has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.