Lamb Weston (LW - Free Report) is sailing on rough seas, thanks to rising costs and challenges in the European region. Well, this Zacks Rank #4 (Sell) stock lost nearly 13% in the past three months, against the industry’s rise of 6.1%. Let’s take a look at the factors affecting the company.
High Costs are a Concern
Lamb Weston’s SG&A expenses have been rising since the past few quarters. In third-quarter fiscal 2019, adjusted SG&A expenses increased $8.2 million due to escalated IT and infrastructure-related costs as well as greater sales and marketing investments. Moreover, advertising and promotional costs grew year over year.
For fiscal 2019, management expects SG&A costs to increase considerably due to planned investments to support upgrade of information systems and enterprise resource planning infrastructure. Also, higher SG&A cost expectations include the company’s plans to invest more toward enhancing innovations, sales, marketing and other functional capabilities to augment operating efficiencies and fuel growth. These factors may exert pressure on the bottom line.
Additionally, the company expects transportation, input and manufacturing costs to increase in fiscal 2019. It expects cost of potatoes to remain high in the fourth quarter.
Headwinds in Europe
Lamb Weston anticipates the operating environment in Europe to be uncertain in fiscal 2019 and in the first half of fiscal 2020, thanks to a poor potato crop. As crops in Europe are highly dependent on rainfall, drought conditions during the months of July and August are likely to impact yield and quality. Consequently, potato prices have increased. The company projects prices to stay high for its Lamb Weston/Meijer European joint venture and the industry throughout fiscal 2019. Also, the impacts are expected to linger in the first half of fiscal 2020.
We note that Lamb Weston is progressing well with capital expansions, strengthening of commercial and supply-chain networks as well as innovations. We expect such upsides to revive the stock in the forthcoming periods.
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