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Lamb Weston (LW) Gains on Retail Demand Amid Foodservice Declines

Like several players in the food space, Lamb Weston Holdings, Inc. LW has been benefiting from strength in its Retail business, courtesy of high demand amid the pandemic-induced elevated at-home consumption. Certainly, the company’s efforts to boost capacity have been helping it effectively cater to the rising demand for snacks and fries.

However, this producer, distributor and marketer of value-added frozen potato products has been struggling with weak demand in the away-from-home lines due to the adverse impact of the pandemic on traffic at restaurants and other non-commercial foodservice customers, such as lodging, hospitality, healthcare, schools and universities, to name a few. Also, high COVID-19-related supply-chain costs are a burden. Nonetheless, the company’s robust price/mix has been aiding. Let’s delve deeper.

Factors Indicating Lamb Weston’s Strength

Notably, Lamb Weston has a solid Retail segment, which comprises revenues from private label and branded items to mass merchant, grocery and club customers across North America. The company’s Retail business sales grew 23% to $162.5 million in the third quarter of fiscal 2021. Volumes rose 13% on the back of robust growth in shipments of mainstream and premium brand offerings. Higher at-home consumption amid the pandemic is likely to keep aiding Lamb Weston’s retail business in the near term.

Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise

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

Incidentally, the company provided an update on the shipping trends for the first four weeks of the fourth quarter of fiscal 2021, until Mar 28, 2021. We note that management has offered a comparison with shipments during the fourth quarter of fiscal 2019, as it serves as a more meaningful base. In this regard, the company’s shipments in the United States were nearly 90% of the fourth-quarter fiscal 2019 level, driven by shipments to QSR and large full-service chain restaurants, as well as to customers served by the Retail segment. Notably, shipments to customers served by the Retail segment were about 110% of the fourth-quarter fiscal 2019 level. Other food companies gaining on pandemic-led increased demand include The J.M. Smucker SJM, Kellogg K and TreeHouse Foods THS.

Meanwhile, Lamb Weston has been undertaking initiatives to boost offerings and operating capacity. In March 2021, the company unveiled plans to build a new french fry processing facility in Ulanqab, Inner Mongolia, China. Notably, this will be an addition to the company’s existing production capacity in China, which is the one in Shangdu, Inner Mongolia. Earlier, the company completed the expansion of a facility located at Hermiston, Oregon, on Jun 18, 2019. The expansion has facilitated the addition of a new processing line for increasing the production of frozen french fries.

Major Headwinds

Softness in the away-from-home food lines, together with high costs, weighed on the company’s third-quarter fiscal 2021 results, wherein both top and bottom lines declined year over year. Net sales came in at $895.8 million, which declined 4% year on year due to reduced demand for frozen potato products in the away-from-home channel, stemming from restrictions on restaurants and other foodservice operations to curb the coronavirus spread. Nonetheless, the rate of shipments improved on a sequential basis from a 14% drop witnessed in the first half of fiscal 2021.

Foodservice segment sales declined 22% to $219.5 million, with volumes down 24%, marred by lower demand due to pandemic-led traffic declines at restaurants and non-commercial customers. Well, shipment and order trends witnessed improvements as the quarter progressed, backed by the impact of the relaxation of government restrictions on restaurant traffic, together with gains from a relatively mild winter. However, management on its earnings call said that shipments to non-commercial foodservice customers in the United States are likely to remain weak throughout the fourth quarter.

Apart from these, high COVID-19-related costs have been weighing on Lamb Weston’s gross margin for a while now. In the third quarter of fiscal 2021, gross profit decreased 21.4% to $196.7 million due to soft sales and escalated manufacturing costs, which in turn stemmed from input cost inflation along with additional costs and inefficiencies associated with the impact of COVID-19 on Lamb Weston’s production, warehousing and transportation operations. Clearly, the impact of the pandemic on its supply-chain operations escalated its cost burden. Additionally, the company saw elevated costs associated with capital, repair and maintenance activities, which were delayed at the time of the coronavirus outbreak.

We note that SG&A expenses escalated $8.2 million in the third quarter due to investments to enhance the company’s manufacturing, supply-chain structure and IT infrastructure. EBITDA (including unconsolidated joint ventures) declined 27% to $167.1 million due to lower income from operations, which in turn was a result of soft sales and a reduced gross margin. Management expects the operating environment to remain tough due to the pandemic and anticipates to continue incurring elevated supply-chain costs in the near term. The company anticipates continued incremental pandemic-led costs at its manufacturing, commercial, functional and distribution operations. These include costs related to ensuring sanitization, improved health and safety for employees, increased transportation and warehousing expenses, and reduced overall factory utilization and shutdown-related costs, among others.

Wrapping Up

Lamb Weston is taking strong measures to curtail the cost structure and expand efficiencies in manufacturing as well as commercial operations. Also, the company’s top line has been benefiting from a robust price/mix. This was witnessed during the third quarter, wherein price/mix rose 2% on improved pricing in Retail and Foodservice segments, along with a better mix in the Retail unit. This somewhat aided sales, which were otherwise negatively impacted by lower volumes. We believe that such upsides, together with strong retail demand and gradual recovery in the foodservice channel should work well for Lamb Weston.

This Zacks Rank #3 (Hold) stock has gained 3.4% in the past three months compared with the industry’s rise of 9.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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