Yahoo Finance Lamb Weston (LW) Counters Cost Challenges With Pricing Strategy
Lamb Weston Holdings, Inc. LW is actively implementing pricing strategies to counter inflationary pressures. The provider of value-added frozen potato products is expanding production capacity to sustain long-term growth, although subdued restaurant traffic is a concern.
Let’s discuss this in detail.
What’s Favoring Lamb Weston?
Lamb Weston has been benefiting from a favorable pricing environment, as reflected in a 4% increase in price/mix during third-quarter fiscal 2024. This uptick stems from ongoing pricing actions driven by inflation, initiated in fiscal 2023. Pricing adjustments across its North America and International segments have also contributed to the positive performance. The company's sustained focus on pricing strategies is expected to bolster top-line growth. Management anticipates net sales between $1.69 billion and $1.75 billion for the fourth quarter of fiscal 2024, supported by stronger price/mix dynamics.
The Zacks Rank #3 (Hold) company’s robust balance sheet and strong cash generation position it well to enhance production capacity and sustain long-term growth. Its initiatives to expand offerings and increase capacity effectively meet the growing demand for snacks and fries.
In the first three quarters of fiscal 2024, capital expenditures totaled $828.3 million, primarily due to construction and equipment expenses for the new China factory, which commenced operations in November. Costs related to capacity expansion projects in Idaho, the Netherlands and Argentina were incurred. For the fiscal 2024, the company anticipates capital expenditures to reach $950 million.
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High-Cost Environment
Lamb Weston has been witnessing increased SG&A expenses for a while. In the third quarter of fiscal 2024, Lamb Weston observed a rise in adjusted SG&A expenses by $30.4 million to $164.4 million, primarily due to incremental costs related to the consolidation of EMEA and increased expenses linked to ERP system transition, including noncash amortization. The company expects SG&A expenses for the fiscal 2024 to range between $745 million and $755 million, with adjusted SG&A projected at $190-$195 million for the fourth quarter.
Despite a year-over-year increase in adjusted gross profit, Lamb Weston faced challenges from elevated costs per pound, driven by mid-single-digit inflation for key inputs such as raw potatoes, labor, energy and ingredients used in product coatings, posing a continued threat to its performance.
Volume-Related Concerns
Lamb Weston continues registering lower volumes, as witnessed in the fiscal third quarter. Quarterly volumes declined 16% as a result of unfilled customer orders during the company's shift to a new enterprise resource planning system or ERP in North America. The remaining downside was mainly due to subdued restaurant traffic patterns in North America and other key global markets, along with the ongoing impact of the company's strategic decision last year to discontinue certain lower-priced and lower-margin business lines aimed at optimizing the customer and product mix. We believe that traffic trends continue to remain challenging as consumers are still adapting to higher menu prices.
LW’s stock has declined 15% in the past three months against the industry’s 1.9% growth.
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Utz Brands Inc. UTZ manufactures a diverse portfolio of salty snacks, currently carrying a Zacks Rank #2 (Buy). UTZ has a trailing four-quarter earnings surprise of 2% on average.
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McCormick & Company, Inc. MKC is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for McCormick & Company’s current fiscal-year sales and earnings indicates advancements of 0.3% and 5.6%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 5.4%, on average.
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