Lamb Weston Holdings, Inc. LW released results for the first quarter of fiscal 2023, in which net income increased year-over-year and topped Zacks’ consensus estimate. Revenue grew year on year, but missed the consensus bar. Management reaffirmed its outlook for fiscal year 2023.
Results benefited from pricing actions across all business segments as well as manufacturing cost savings undertaken to mitigate inflation. That said, it saw weak volumes in the quarter due to lackluster restaurant traffic trends and supply chain hurdles affecting production rates at its factories.
Quarter in detail
LW’s net income came in at 75 cents per share, beating Zacks’ consensus estimate of 52 cents. Revenue jumped 317% year over year. The benefit can be contributed to higher operating income.
Net sales were $1,125.6 million, up 14% year-over-year. Price/mix rose 19%, reflecting gains in pricing actions across the company’s core business segments to counter inflation in input, manufacturing and transportation costs. Volumes fell 5%, primarily due to lower traffic at casual and full-service restaurants in the United States. Additionally, the timing of shipments to large restaurant chain customers has been a headwind. Lamb Weston’s shipments to foodservice and retail channels across the United States continued to be impacted by its inability to fully meet customer demand resulting from widespread supply chain restrictions in the United States. industry, such as shortages of labor and raw materials. The first line missed Zacks’ consensus estimate of $1,141.3 million.
Lamb Weston Price, Consensus and EPS Surprise
Lamb Weston price-consensus-eps-surprise-chart | Weston Lamb Quote
Gross margin was $273.3 million, up $122 million, driven by favorable price/mix and productivity initiatives. Rising manufacturing and distribution costs per book and reduced sales volumes were a concern for the metric. Higher costs per pound primarily reflect double-digit cost inflation for key inputs like edible oils, ingredients i.e. grains and starches used for product coatings, labor costs and transportation costs. Higher costs per pound also reflect increased costs associated with the impact of extreme summer heat, which negatively impacted yield and quality of potato crops in the Northwest Pacific in the fall of 2021. Additionally, the impacts of labor and product shortages on production cycle rates were headwinds.
SG&A expenses increased by $25.2 million to $116.3 million, primarily due to higher compensation and benefits expenses and higher expenses associated with improving its information and technology services infrastructure.
Adjusted EBITDA (including unconsolidated joint ventures) jumped 92% to $227.8 million, driven by higher operating profit.
Sector analysis
Sales in the Global rose 12% to $559.7 million. Volumes fell 2% while price/mix increased 14%. The price/mix ratio benefited from the positive mix as well as the national and international actions on product and freight prices undertaken to counter inflation. The timing of shipments to large QSR chain customers across the United States resulted in lower volumes. The segment’s product contribution margin jumped 96% to $83.7 million.
food service sales increased 14% to $366.3 million. Volumes were down 12% and price/mix jumped 26%. The favorable price/mix ratio reflects carryover gains from product and freight pricing measures aimed at mitigating inflation. The company has seen weak demand in the segment’s foodservice and non-commerce channels, including lodging and hospitality, healthcare, schools and universities, among others. It also saw a decline in restaurant traffic due to inflationary pressures on consumer discretionary spending. Revenue contribution margin increased 43% to $138.2 million.
In the Detail segment, sales increased 28% to $169.6 million. Price/mix was up 32%, but volumes were down 4%. The price/mix benefited from the carry-over effect of price actions in the brand and private label portfolios carried out to fight against inflation. Lower shipments of private label products hurt sales volume. Product contribution margin jumped 229% to $48.7 million.
Other financial details
Lamb Weston ended the quarter with cash and cash equivalents of $485.3 million, long-term debt and funding obligations (excluding current portion) of $2,700.1 million and total equity of $510 million. The company generated $192.1 million in net cash from operating activities for the 13 weeks ended August 28, 2022. Capital expenditures (including IT expenditures) were $121.2 million during this period. For fiscal 2023, the company expects cash used for capital expenditures to be between $475 million and $525 million.
During the quarter under review, management paid dividends worth $35.3 million and repurchased shares worth $28.4 million, returning $63.7 million to its shareholders .
Image source: Zacks Investment Research
Tips
For fiscal 2023, management expects net sales growth in the range of $4.7 billion to $4.8 billion. Net sales growth should be supported by pricing measures to counter significant inflation in input and transportation costs. Additionally, an improved mix is likely to drive growth.
Lamb Weston expects SG&A spending of between $475 million and $500 million, indicating larger investments to upgrade information systems and enterprise resource planning infrastructure, as well as increased compensation and benefit costs. Adjusted EBITDA (including unconsolidated joint ventures) is expected to be between $840 million and $910 million. Adjusted net income is expected to be between $360 million and $410 million. Adjusted diluted earnings per share (EPS) is expected in the range of $2.45 to $2.85.
Management expects interest expense of approximately $115 million for fiscal 2023 and an effective tax rate of approximately 24%. In addition, it projects depreciation and amortization expenses of approximately $210 million.
Management expects gross margin to remain under pressure in the first half of fiscal 2023 due to significant inflation in key production inputs, transportation and packaging, and rising production costs. raw potato per pound. Gross margin is also likely to bear the negative effects of supply chain obstacles, leading to operational bottlenecks such as labor and raw material shortages. That said, gross margin is expected to improve and reach normalized annual levels of 25-26% in the second half of the fiscal year.
Shares of this company Zacks Rank No. 2 (buy) have gained 7.3% over the past three months against a 6.3% decline in the sector.
Other actions to consider
Some other top ranked stocks are Lancaster Colony LANC, Hershey HSY and The JM Smucker SJM.
Lancaster Colony, which manufactures and markets food products for the retail and foodservice markets, currently sports a Zacks rating of 1 (Strong Buy). LANC achieved a 170% profit surprise in the latest reported quarter. You can see the full list of today’s Zacks #1 Rank stocks here.
Zacks’ consensus estimate for Lancaster Colony’s current-year sales and EPS suggests growth of 9.6% and 38.3%, respectively, over corresponding figures released a year ago.
Hershey, North America’s largest chocolate maker as well as a global leader in chocolate and non-chocolate confectionery, currently has a Zacks rank #2. 7% on average.
Zacks’ consensus estimate for Hershey’s sales and EPS for the current fiscal year suggests growth of 13.9% and 14.4%, respectively, from numbers reported a year ago.
JM Smucker, which manufactures and markets branded food and beverage products, carries a Zacks rank of No. 2. JM Smucker delivered a surprise on earnings for the past four quarters of 20.8% on average.
Zacks’ consensus estimate for SJM’s current-year sales suggests growth of 4.4% from the figure reported a year ago.
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