November 28, 2021

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Why Is Lamb Weston (LW) Up 23% Since Last Earnings Report?

A month has gone by since the last earnings report for Lamb Weston (LW). Shares have added about 23% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lamb Weston due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Lamb Weston’s Q3 Earnings Lag Estimates, View Withdrawn

Lamb Weston delivered dismal third-quarter fiscal 2020 results, wherein both top and the bottom lines fell short of the Zacks Consensus Estimate. In fiscal third quarter, the company delivered adjusted earnings of 77 cents per share, down 19% year over year. The downside can be attributable to lower gross profit, higher tax rate and a rise in SG&A expenses. Moreover, the bottom line lagged the Zacks Consensus Estimate of 92 cents.

Net sales came in at $937.3 million, up 1% year on year, though it missed the consensus mark of $954 million. While volumes were flat, price/mix rose 1%. For volumes, growth in the Foodservice segment was offset by weak Global segment volumes. Further, fewer shipping days this year was a drag on volumes, though acquisitions were a driver.

Gross profit tumbled 8.4% to $250.4 million due to increased manufacturing costs stemming from input and fixed cost inflation as well as unfavorable customer mix. Further, gross profit was hurt by higher transportation cost and depreciation expenses related to the company’s french fry production line in Oregon. Also, costs resulting from COVID-19-related production interruptions in China were a reason.

SG&A expenses increased 10.4% to $87.9 million due to investments in the company’s sales, operating as well as systems capabilities. Also, unfavorable currency movements impacted SG&A expenses. Adjusted EBITDA (including unconsolidated joint ventures) declined10% to $227.7 million due to lower operating income.

Segment Analysis

Sales in the Global segment dipped 2% to $487.1 million. Volumes and price/mix dropped 1% each, bearing adverse impacts of lower sale of customized products and LTOs. Volumes were also hurt by initial impact of coronavirus on restaurant traffic. Product contribution margin in the segment tumbled 15% to $109.3 million due to elevated production costs, reduced sales volumes and adverse product and customer mix.

Foodservice sales rose 7% to $283 million. Price/mix and volumes improved 4% and 3%, respectively. Product contribution margin rose 5% million to reach $99.8 million, owing to improved price/mix and volumes. This was partly offset by inflated input and fixed costs along with high transportation costs.

In the Retail segment, sales moved up 2% to $132.2 million. Volumes in the category were flat whereas price/mix improved 2%. Product contribution margin inched down 1% to $28.8 million due to inflation of input and fixed costs along with greater transportation costs. This was somewhat compensated by reduced advertising and promotional costs and improved price/mix.

Other Financial Details & Guidance

The company ended the quarter with cash and cash equivalents of $30.1 million, long-term debt and financing obligations (excluding current portion) of $2,195.3 million as well as total shareholders’ equity of $270.4 million. Lamb Weston generated $435.7 million as net cash from operating activities during the first three quarters of fiscal 2020.

Considering the uncertainty related to COVID-19, management is unable to foresee frozen potato products demand in the near term. Management 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. Also, management lowered its capital expenditure guidance from roughly $300 million to nearly $200 million for the fiscal.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -77.05% due to these changes.

VGM Scores

Currently, Lamb Weston has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

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