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Lamb Weston (LW) to Post Q1 Earnings: Will Cost Woes Linger?

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Lamb Weston Holdings, Inc. (LW - Free Report) is slated to release first-quarter fiscal 2020 results on Oct 2. This manufacturer, marketer and distributor of value-added frozen potato products has a robust earnings surprise history. The company’s earnings outperformed the Zacks Consensus Estimate by average of 10.1% in the trailing four quarters.

Let’s see what’s in store for the company this time around.

Lamb Weston Holdings Inc. Price and EPS Surprise

Lamb Weston Holdings Inc. Price and EPS Surprise

Lamb Weston Holdings Inc. price-eps-surprise | Lamb Weston Holdings Inc. Quote

What to Expect?

The Zacks Consensus Estimate for earnings in the first quarter has been stable over the past 30 days at 80 cents, which suggests an increase of 9.6% from the year-ago period’s reported figure. The consensus mark for revenues is $972 million, indicating an increase of 6.2% from the figure reported in the year-ago quarter.

Factors to Aid Results

Lamb Weston’s first-quarter results are likely to gain from limited time offers or LTO innovation, which have been a major strength. Incidentally, LTOs helped drive growth and market share in fiscal 2018 and 2019. More specifically, LTOs are aiding volume growth in the company’s Global segment. Well, the Global segment accounted for more than half of Lamb Weston’s fourth-quarter fiscal 2019 sales and is a major driver for the quarter under review.

Also, the company’s top line is likely to benefit from robust price/mix, courtesy of prudent pricing actions. This apart, Lamb Weston’s initiatives to boost offerings and operating capacity bode well. These efforts enable the company to effectively meet the rising demand for snacks and fries. Markedly, it has completed acquiring joint venture interests in Lamb Weston BSW. This buyout is expected to contribute approximately $10 million to earnings during the first half of fiscal 2020, which gives out positive signals for the quarter to be reported.

It also completed the buyouts of Marvel Packers and Ready Meals, which are expected to bolster the company’s market share in Australia.  Additionally, the company completed the expansion of a facility located in Hermiston, OR. The expansion has facilitated the addition of a processing line to increase the production of frozen french fries. This is expected to cater to the demand in North America and key export markets. We expect these endeavors to positively impact Lamb Weston’s performance in the quarter to be reported.

Will Hurdles be Countered?

Lamb Weston has been witnessing input cost inflation and escalating supply-chain costs, including transportation and manufacturing. This exerted pressure on the 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. The company earlier stated that it expects increased transportation, input and manufacturing costs for fiscal 2020.

Additionally, Lamb Weston’s SG&A expenses have been rising year over year for the last few quarters. For fiscal 2020, management expects SG&A costs to increase considerably due to planned investments for upgrading information systems. Also, increased SG&A costs include the company’s plans to invest more toward enhancing innovation, sales, marketing and other functional capabilities. This along with input cost inflation poses a threat to the bottom line in the to-be-reported quarter.

In fact, many other food companies like Campbell Soup (CPB - Free Report) , General Mills (GIS - Free Report) and TreeHouse Foods (THS - Free Report) , among others, are battling cost inflation. Nevertheless, Lamb Weston is making efforts to counter these headwinds by augmenting savings through supply-chain efficiencies. However, it remains to be seen if the company’s growth efforts can help it continue its impressive record this time around.

What the Zacks Model Unveils

Our proven model doesn’t show a beat for Lamb Weston this earnings season. For this to happen, a stock needs to have both 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.

Though Lamb Weston has an Earnings ESP of +1.89%, it carries a Zacks Rank #4 (Sell), which makes surprise prediction difficult. Notably, we caution against sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement.

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

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