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Lamb Weston Gains From Pricing Actions, Input Costs a Worry

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Yielding growth strategies, well-chalked buyouts and advancements in the base business have maintained Lamb Weston Holdings, Inc.’s LW position in investors’ good books. The stock has gained 15.3% in the past three months compared with the industry’s rise of 5.4%. However, the company is exposed to threats such as rising expenses and adversities in Europe. Let’s take a closer look.

Price/Mix, Buyouts & Expansion Initiatives Bode Well

Lamb Weston’s top line has been gaining from robust price/mix, as witnessed during the fourth quarter of fiscal 2019.  During the quarter, price/mix rose 3% and 6% at the Global and Foodservice units, respectively. The upside was backed by prudent pricing actions. Continuity of such trends is likely to augment sales growth. Further, the company is augmenting savings through supply-chain efficiencies. In fact, improved mix, volumes and savings drove gross profit during the fourth quarter.

Lamb Weston is augmenting its portfolio through strategic buyouts. Markedly, it completed acquiring joint venture interests in Lamb Weston BSW. Management expects this buyout to contribute approximately $10 million to earnings during the first half of fiscal 2020. It also completed the buyout of Marvel Packers, a 50 million-pound potato processor engaged in serving the fish and chip market in Australia. In recent developments, the company completed the acquisition of Ready Meals — Australia’s renowned frozen potato processing company.

Speaking on capacity-expansion endeavors, the company completed the expansion of a facility located at Hermiston, Oregon. The expansion has facilitated the addition of a new processing line for increasing the production of frozen french fries. Management expects that volume growth in fiscal 2020 is likely to be driven by the Oregon facility expansion.

Additionally, we note that limited time offers or LTO innovations have been boosting the company’s market share, as witnessed in fiscal 2018 and fiscal 2019. More specifically, LTOs are aiding volume growth in the company’s Global segment. Management is positive about further prospects from new LTOs.

Hurdles in the Path

Rising input costs, stemming from commodities, transportation and manufacturing is a hurdle for Lamb Weston. Well, this exerted pressure on gross margin during the fourth quarter of fiscal 2019. Such high costs were also a drag on product contribution margins in the Global and Foodservice units during the said period. Incidentally, the company expects input cost to keep rising in fiscal 2020. Persistent rise in SG&A expenses are also a concern for the company.

Moreover, poor potato crop scenario in Europe has been a headwind for Lamb Weston for a while. Management expects average harvest yields from Europe in fiscal 2020. This is expected to intensify competition in the region and in key export markets.

Nevertheless, we expect the company to easily tide over such hurdles on the back of solid pricing and savings initiatives. Also, the company’s capital expansions, strength of its commercial and supply-chain networks as well as focus on innovations are encouraging. Such upsides combined with expectations of sound market conditions led management to issue favorable outlook for fiscal 2020.

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