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Will Input Costs Weaken Lamb Weston's (LW) Q3 Earnings?

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Lamb Weston Holdings, Inc. (LW - Free Report) is slated to release third-quarter fiscal 2019 results on Apr 2, 2019. This provider of frozen potato products boasts a splendid surprise history. Notably, the company has outperformed earnings and sales estimates since its spin-off from Conagra Brands (CAG - Free Report) . Let’s see how things are shaping up ahead of the quarterly release.

What to Expect?

The Zacks Consensus Estimate for earnings for the impending quarter has been stable in the past 30 days at 82 cents per share. The figure reflects a decline of almost 9.9% from the year-ago quarter’s tally. However, the consensus mark for revenues is pegged at $901 million, reflecting an improvement of nearly 4% from year-ago quarter’s figure.

LTOs & Global Unit: Major Sales Drivers

Lamb Weston is benefitting from limited time offers or LTO innovations for long.  Incidentally, LTOs fueled growth and market share gains in fiscal 2018. In the second quarter of fiscal 2019, LTOs contributed significantly to volume growth in the Global segment. Management is positive about further prospects from new LTOs. Also, it expects the new French Fries line to enable the company enter into tie-ups with customers and boost traffic.

Speaking of the Global segment, the unit contributes a major portion to the company’s overall sales and is a key growth catalyst. The segment is gaining from better price/mix and higher volumes.  Volumes are being driven by strong sales to consumers in the United States and core international regions as well as gains from LTOs. Price/mix is being fueled by ongoing impacts of pricing actions undertaken in 2018 and favorable mix.

Apart from the Global segment, efficient pricing strategies are fueling performance in the Retail and Foodservice units.  Also, the company is focused on making investments to enhance capacity and improve customer services.

We expect the aforementioned factors to positively impact the company’s performance in the upcoming quarterly results.

Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise



Headwinds Likely to Weigh on Profitability

Lamb Weston’s SG&A expenses have been rising year over year for the past few quarters. For fiscal 2019, management expects SG&A costs to increase considerably due to planned investments undertaken to support upgrade of information systems and enterprise resource planning infrastructure.

Moreover, fluctuations in input prices are likely to hurt operations. Incidentally, the company expects increased transportation, warehousing, input and manufacturing costs to persist in fiscal 2019. In fact, we note that many other food companies like Campbell Soup (CPB - Free Report) and United Natural Foods (UNFI - Free Report) , among others, have been bearing the brunt of input cost inflation.

Coming back to Lamb Weston, management expects gross profit growth to be lower than sales growth in the second half of fiscal 2019. The downside is likely to be caused by high costs along with unfavorable mix from lower LTOs and higher exports that usually come with lower margins. Clearly, such deterrents raise concerns regarding the company’s bottom line in the to-be-reported quarter.

What the Zacks Model Unveils

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 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’s Earnings ESP of 0.00% combined with its Zacks Rank #4 (Sell) makes us apprehensive about an earnings beat. Markedly, we caution against sell-rated stocks (Zacks Rank #4 or 5) going into earnings announcement.

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

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