December 4, 2021

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Is Coronavirus Impact the Only Concern?

Lamb Weston Holdings, Inc. LW, which was already grappling with rising input costs and escalated SG&A expenses, looks all the more troubled now. The company recently reported lower-than-expected third-quarter fiscal 2020 results, wherein earnings declined year over year. Moreover, management withdrew its fiscal 2020 sales and adjusted EBITDA view owing to the apprehended impact of the rapid spread of coronavirus.

Markedly, shares of this Zacks Rank #5 (Strong Sell) company have tumbled 35% year to date compared with the industry’s decline of 13.4%. Further, the Zacks Consensus Estimate for fourth-quarter and fiscal 2020 earnings has witnessed a massive decline in the past 30 days. The consensus mark for fourth-quarter earnings has plummeted sharply from 78 cents to 15 cents, whereas the same for the fiscal has declined 23.3% to $2.66.

On that note, let’s delve deeper into the factors weighing on Lamb Weston.

COVID-19 Impacts in Detail

During the third quarter, volumes were negatively impacted by declines in the Global segment, wherein the initial impact of coronavirus on restaurant traffic was a deterrent. Notably, the company largely caters to quick-serve restaurants or QSRs as well as full-service restaurants and outlets. Apart from this, it sells through retail outlets. The growing spread of coronavirus and increased social distancing have led to lower traffic at restaurants and QSRs, especially in the United States, leading to declining orders for Lamb Weston.

Though these operators are coming up with takeout and delivery options, this can only compensate partly for the lost sales. In fact, management expects traffic at full-service restaurants to fall more sharply than QSRs. On the contrary, Lamb Weston is seeing better trends in the Retail segment, given the increased demand for frozen fries stemming from stockpiling during the quarantine. In Europe, where the company serves through its Lamb Weston Meijer joint venture, most of the consumption is through dine-in and takeaways via walk-in traffic. The adverse impact of coronavirus on demand in this space has been the highest in Italy. Other countries are also seeing lower demand due to several restrictions on social movements. Management expects the decrease in demand to accelerate in these countries, which is likely to hurt Lamb Weston Meijer’s performance.

Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise

Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise

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

Overall, management is unable to foresee frozen potato products’ demand in the near term, considering the uncertainty related to COVID-19. It is particularly unsure about the impact of the pandemic on restaurant traffic in North America. Thus, the company withdrew its sales and adjusted EBITDA guidance for fiscal 2020.
 
Escalated Cost Concerns

Lamb Weston is witnessing cost increases for input materials as well as manufacturing. In third-quarter fiscal 2020, gross profit declined 8.4% to $250.4 million due to increased manufacturing costs stemming from input and fixed-cost inflation as well as unfavorable customer mix. Also, costs resulting from COVID-19-related production interruptions in China were a reason behind the decline. Additionally, Lamb Weston’s SG&A expenses have been rising year over year for the past few quarters. In third-quarter fiscal 2020, SG&A expenses increased 10.4% to $87.9 million due to investments in the company’s sales, operating and system capabilities. Continuation of these may be a burden on the bottom line.

Though Lamb Weston has been focused on enhancing performance through limited time offerings and capacity expansion endeavors, the aforementioned concerns cannot be ignored for at least the near term.

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