Shares of Lamb Weston Holdings, Inc. (LW - Free Report) have lost 7.8% against the industry’s growth of 9.2% in the past six months.
This Zacks Rank #3 (Hold) company’s SG&A expenses have been rising year over year for the past few quarters and are likely to remain high in fiscal 2019. Additionally, management expects transport, input and manufacturing cost inflation to persist. Management also anticipates headwinds like a poor potato harvest, though it expects to offset these through solid pricing and cost-saving initiatives.
In third-quarter fiscal 2019, adjusted SG&A expenses increased $8.2 million on higher IT and infrastructure-related costs along with greater sales and marketing investments. Additionally, advertising and promotional costs grew year over year. For fiscal 2019, management expects SG&A costs to increase considerably due to planned investments undertaken to upgrade information systems and enterprise resource planning infrastructure. These may hurt margins to an extent in the short run. Also, Lamb Weston anticipates the operating environment in Europe to be uncertain in fiscal 2019 and the first half of fiscal 2020, thanks to a poor potato harvest.
Endeavors Well on Track
Markedly, the company is undertaking efforts to bolster production capabilities, as demand for snacks and fries is rising worldwide. In sync with this, Lamb Weston inked a deal to acquire one of Australia’s renowned frozen potato processing companies — Ready Meals Pty Ltd.
Earlier, the company completed the expansion of the Hermiston, OR-based facility. The expansion has added a processing line to increase the production of frozen french fries.
Apart from capacity expansion, the company is striving to strengthen commercial networks and bolster portfolio through innovation. It also resorts to limited time offers (LTO) to expand revenue prospects. Further, Lamb Weston is gaining from robust price/mix across most segments. In the third quarter of fiscal 2019, LTOs accounted for significant volume growth in the Global segment.
Sales at the Global segment increased 11% to $498.2 million in the fiscal third quarter, driven by better price/mix and higher volumes. Volumes increased owing to strong sales to strategic consumers in the United States and core international regions, and gains from LTOs. Strength in pricing at this segment is likely to drive Lamb Weston’s sales in fiscal 2019. For the fiscal, management expects net sales to increase high-single digits compared with the prior view of mid-to-high-single digits.
With such efforts on track, we believe the stock will be back on the growth trajectory, in the absence of any unprecedented event.
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