Lamb Weston Holdings, Inc. LW reported first-quarter fiscal 2021 results, wherein both top and bottom lines declined year over year and the former fell short of the Zacks Consensus Estimate. Results were affected by lower demand due to the adverse impact of the pandemic on traffic at restaurants and other foodservice channels. Also, higher pandemic-related costs have been a deterrent.
Nonetheless, sales and earnings improved sequentially and the company is positive about the improvement in traffic at restaurants in the United States and core international markets. In the United States, demand stabilized in the latter part of the first quarter and also in September, thanks to a rebound in quick-service restaurants, increased deliveries and improved trends at full-service restaurants as curbs on pandemic-led restrictions are being lifted. However, demand remains below pre-pandemic levels. Retail demand for branded products remained steady, though lower than its peak in the initial weeks of the virus outbreak. Overall pricing has been stable.
Quarter in Detail
The company’s earnings of 61 cents per share declined 23% year over year due to soft sales and lower gross profit. The bottom line, however, easily surpassed the Zacks Consensus Estimate of 30 cents per share.
Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise
Lamb Weston Holdings Inc. price-consensus-eps-surprise-chart | Lamb Weston Holdings Inc. Quote
Net sales came in at $871.5 million, which tumbled 12% year on year and missed the consensus mark of $878 million. Volumes fell 14% year over year due to a decline in demand for frozen potato products in the away-from-home channel due to restrictions on restaurants and other foodservice operations to curb the coronavirus spread. Nevertheless, higher at-home consumption of frozen potato products amid the pandemic offered some respite. Notably, the price/mix rose 2% on the back of improvement in the Retail and Foodservice segments.
Gross profit of this Zacks Rank #4 (Sell) company decreased nearly 14% to $213.8 million due to soft sales and escalated costs associated with COVID-19, such as inefficiencies and production costs related to factory utilization and costs associated with producing retail products on channels mainly created for foodservice products, among others.
SG&A expenses declined $0.5 million to reach $78.1 million on the back of reduced advertising and promotional costs as well as effective cost management. This was somewhat mitigated by higher pandemic-related costs discussed above.
EBITDA (including unconsolidated joint ventures) declined 13% to $201.8 million due to lower operating income and pandemic-led expenses worth $21 million.
Sales in the Global segment dropped 14% to $447.5 million. Volumes and price/mix fell 13% and 1%, respectively. Volumes were hurt by lower demand for frozen potato products away from home due to the adverse impact of coronavirus on restaurants and other foodservice-related traffic. Traffic was soft in the United States as well as the main international markets. Product contribution margin in the segment dropped 24% to $77.8 million due to reduced sales and pandemic-related expenses.
Foodservice sales declined 22% to $236.7 million. Price/mix rose 6%, whereas volumes declined 28%. Volumes were marred by lower demand due to pandemic-led traffic declines at restaurants as well as non-commercial customers like lodging and hospitality, schools, sports and entertainment, and workplace environments, among others. Product contribution margin fell 16% to reach $85.8 million on account of reduced sales volume and pandemic-related costs, somewhat made up by improved price/mix.
In the Retail segment, sales grew 19% to $153.9 million. Price/mix and volumes increased 8% and 11%, respectively. Volumes were backed by increased demand due to the pandemic-led higher at-home consumption. Product contribution margin improved 24% to $35.8 million on the back of increased sales volume, improved mix and reduced advertising and promotional costs. This was partly countered by costs related to COVID-19.
Other Financial Details
Lamb Weston ended the quarter with cash and cash equivalents of $1,032.5 million, long-term debt and financing obligations (excluding current portion) of $2,980.8 million and total shareholders’ equity of $332 million.
The company generated $250.6 million as net cash from operating activities during the quarter, wherein capital expenditures amounted to $33.2 million. Management paid out dividends worth $34 million during the quarter. In the first quarter, management repaid $495 million, which was borrowed from the company’s revolving credit facility during the fourth quarter of fiscal 2020.
Moreover, the company unveiled an amendment to its revolving credit facility on Sep 17, increasing its capacity to $750 million, with the maturity extended to Sep 17, 2023. In connection with this, the company utilized cash in hand to pay the outstanding term loan facility of $271.9 million that was due in November 2021. As of the fiscal month ended Sep 27, 2020, Lamb Weston did not have any outstanding borrowings on its amended revolving credit facility, and had cash and cash equivalents of $800 million.
The company provided an update on the shipping trends for the first four weeks of the second quarter of fiscal 2020, until the week ended Sep 25. In this regard, the company’s shipments in North America are nearly 90% of the prior-year levels, driven by demand from quick-serve restaurants and retail, along with continued recovery at full-service restaurants. Shipments in Europe, Australia and China are reaching year-ago levels. Shipments to other markets in Latin America and Asia are falling short of the demand recovery, stemming from customers and distributors’ inventory optimizing actions.
On the cost front, the company is focused on taking steps to curtail the cost structure and expand efficiencies in manufacturing as well as commercial operations. These include closing down of facilities temporarily, modifying production schedules and more. However, the company anticipates continued incremental pandemic-led costs at its manufacturing, commercial, functional support and supply-chain operations. These include costs related to ensuring sanitization, and health and safety, increased transportation and warehousing expenses, and costs to retain functional support workers, among others.
Shares of Lamb Weston have gained 13.4% in the past three months compared with the industry’s growth of 7.3%.
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Flowers Foods FLO, which currently carries a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 8.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
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