Pricing Actions Drive Lamb Weston (LW) Amid High Costs
Lamb Weston Holdings, Inc. LW continues to reap the benefits of its successful pricing approach. The company, known for its range of frozen potato products, is committed to increasing its production capabilities to stimulate additional expansion. However, it faces challenges from escalating costs in the current economic climate.
Let’s discuss this in detail.
Pricing Strategies
The Zacks Rank #3 (Hold) company is experiencing a favorable pricing environment, evidenced by a 4% increase in price/mix during third-quarter fiscal 2024. The upside can be attributed to consistent pricing adjustments driven by inflation, which began in the fiscal 2023. The company's pricing strategies, implemented across its North America and International segments, have contributed to this positive performance. With a sustained focus on pricing, LW expects to strengthen its top-line growth. Management expects net sales between $1.69 billion and $1.75 billion for fourth-quarter fiscal 2024, supported by favorable price/mix dynamics.
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Expansion Efforts on Track
The company boasts a robust balance sheet and strong cash generation, positioning it well to enhance production capacity and sustain long-term growth. Lamb Weston's efforts to expand its product offerings and increase capacity are meeting the rising demand for snacks and fries.
Throughout the first three quarters of the fiscal 2024, capital expenditures totaled $828.3 million, primarily due to expenses related to construction and equipment for the new China factory, which commenced operations in November. Costs associated with capacity expansion projects in Idaho, the Netherlands and Argentina were also incurred. For the fiscal 2024, the company anticipates capital expenditures to reach $950 million.
Cost Headwinds
Despite a year-over-year increase in adjusted gross profit in the fiscal third quarter, Lamb Weston encountered challenges stemming from elevated costs per pound. These increases were propelled by mid-single-digit inflation affecting key inputs such as raw potatoes, labor, energy and ingredients utilized in product coatings, posing a persistent challenge to the company's performance.
The company experienced a persistent uptick in SG&A expenses over recent periods. During the quarter, the company noted a $30.4-million increase in adjusted SG&A expenses, reaching $164.4 million. The upside primarily stemmed from incremental costs associated with the consolidation of EMEA and heightened expenses related to the transition of enterprise resource planning (ERP) systems, including noncash amortization.
Volume Related Concerns
Lamb Weston experienced a decrease in volumes during the third quarter of fiscal 2024, with a 16% decline attributed to several factors. These include unfilled orders during the transition of ERP systems, subdued restaurant traffic, and the discontinuation of certain business lines. Consumer adaptation to higher menu prices has also contributed to challenging traffic trends. Both the North America and International units saw a 17% decrease in volumes during this period.
For the fiscal fourth quarter, management expects a volume decline in the mid-single digits. This decline is anticipated due to soft restaurant traffic trends across North America and softer-than-expected trends in various key international markets. The ongoing ERP transition may impact volumes for some customers in North America.
Despite the positives mentioned above, it is to be seen if Lamb Weston can navigate through its challenges successfully. LW’s stock has dropped 16% in the past three months compared with the industry’s 4.3% decline.
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