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Lamb Weston Gains 12% Post Q1 Earnings: Can Momentum Sustain?

Zacks

Lamb Weston Holdings, Inc. LW clearly seems to be a preferred pick for investors as shares of this frozen potato products provider have rallied close to 17% in the past six months, comfortably outpacing the industry’s growth of 4%. In fact, Lamb Weston gained a solid 12.2% in just a week’s time, following strong first-quarter fiscal 2019 results announced on Oct 2.



On that note, let’s take a sneak peek into Lamb Weston’s quarterly outcome and see if its growth drivers can help the company sustain momentum amid cost-related headwinds.

Splendid Q1 Results

In first-quarter fiscal 2019, both top and bottom lines grew year over year and beat the Zacks Consensus Estimate for the eighth straight time. Following its spin-off from Conagra Brands CAG in November 2016, the company has been delivering positive earnings and sales surprise. While earnings in the quarter gained from lower tax rate and higher operating income, sales were backed by better price mix, improved products and customer mix, and higher volumes. Also, adjusted EBITDA surged year over year. The solid results reflect the success of Lamb Weston’s capital expansions, strength of its commercial and supply-chain networks, and focus on innovations.

Factors Driving Lamb Weston

Lamb Weston’s sales have been increasing year over year ever for a while now, largely benefitting from its limited time offers or LTO innovations, which are key to the company’s long-term prospects. Incidentally, in the first quarter of fiscal 2019, LTOs accounted for significant volume growth in the Global segment, in particular. Management is positive about further prospects from new LTOs as the company’s new French Fries line is expected to provide it more flexibility to enter into tie-ups with customers and boost traffic.

Talking of the Global segment, it accounted for nearly half of Lamb Weston’s first-quarter sales and remains a major driver for the future. Sales at this segment rose 13%, thanks to better price/mix and higher volumes. Notably, Lamb Weston’s top line has long been gaining from robust price/mix, as it drove sales across all segments in the first quarter. Price/mix rose 8%, backed by gains from various new pricing structures related to recently renewed deals in the Global unit, and continued impacts of pricing and mix enhancement initiatives undertaken in the Retail and Foodservice units. Management expects price/mix to be strong in the first half of fiscal 2019, which is likely to augment sales growth.

Will Escalated Costs Impede Growth?

Lamb Weston’s SG&A expenses increased almost 33% to $78 million in the first quarter of fiscal 2019, on account of higher incentive compensation costs, and escalated advertising and promotional investments. Also, increased IT and infrastructure related costs, and greater sales and marketing investments led to the increase. For fiscal 2019, management expects SG&A expenses to increase considerably due to planned investments undertaken to support upgrade of information systems and enterprise resource planning infrastructure.

Further, like Campbell Soup CPB and General Mills GIS, Lamb Weston remains exposed to input cost inflation. In the first quarter, the company’s gross margin was hit by increased transportation and warehousing expenses, input and production cost inflation, and increased depreciation costs related to the company’s new french fry production line in Richard. Management expects these hurdles to linger in fiscal 2019. Incidentally, total production cost per pound (including potatoes) is expected to rise mid-single digit in the fiscal.

Nevertheless, Lamb Weston is focused on countering cost hurdles through capacity expansion and efforts to drive sales. Further, the company expects the operating environment to be favorable in the remainder of the fiscal. It also expects continued robust demand for frozen potato products and a tight production capacity in the fiscal year. Though management anticipates to face hurdles like a poor potato crop at its European joint venture named Lamb Weston/Meijer, it expects to offset these challenges with solid pricing and cost-saving initiatives as well as opportunities in its North American and export ventures. All said, this Zacks Rank #3 (Hold) company expects fiscal 2019 net sales to increase mid-single digits.

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

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