Lamb Weston Holdings, Inc. LW is encountering fundamental challenges that are affecting its performance. Key issues include difficulties in commercial execution and supply chain operations along with a global decline in demand for frozen fries. The company is facing weaker restaurant traffic trends, which are exerting pressure on profitability. These factors contribute to a tough operating environment, hindering Lamb Weston’s ability to achieve its financial goals and growth targets.
Looking ahead to the fiscal 2025, LW anticipates another difficult year. The Zacks Consensus Estimate for the upcoming quarter’s sales and earnings indicates a year-over-year decline of 6.6% and 55.2%, respectively, reflecting a negative sentiment among analysts.
Year to date, Lamb Weston has shown disappointing stock market performance. The stock has plunged 41.7%, underperforming the Zacks Food - Miscellaneous industry's growth of 4.4%. The leading global manufacturer, marketer and distributor of value-added frozen potato products also lagged the broader Consumer Staples sector’s 10% increase and the S&P 500 rise of 13.2% during the same period. Let’s discuss.
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Volume-Related Concerns for Lamb Weston
LW experienced a decline in volume, evident in the fourth quarter of fiscal 2024. The volume dropped 8%, primarily due to market share losses and its strategic exit from lower-priced, lower-margin businesses in Europe earlier this year. Weak restaurant traffic trends in North America and other key international markets contributed to about 25% of this decline, as consumers continue to adjust to higher menu prices. A voluntary product withdrawal further exacerbated the drop. In North America, volumes fell 7%, with a 5-percentage-point market share loss and 2 percentage points from weak U.S. restaurant traffic. International volumes dropped 9%, with nearly 5 percentage points, due to market share losses and subdued restaurant traffic.
Looking ahead to first-half fiscal 2025, LW projects a low-to-mid single-digit volume decline compared with the previous year’s tally. This forecast accounts for ongoing market share losses and soft restaurant traffic.
High Costs Pressuring LW’s Performance
Lamb Weston is also struggling with high costs that are affecting its performance. In fourth-quarter fiscal 2024, its adjusted gross profit dropped by $72.2 million to $363 million, mainly due to nearly $40 million in losses from voluntary product withdrawals and lower sales volumes. Increased manufacturing costs per pound, thanks to mid-single-digit inflation in raw potatoes, labor and ingredients, along with higher transportation and warehouse expenses, have compounded the issue.
Looking ahead, LW expects the input cost inflation to persist, thanks to a potentially below-average potato crop in Europe. Despite efforts to offset these costs with targeted pricing actions, the cost environment will remain challenging. It is also bracing for higher expenses from new facility investments and IT infrastructure.
Challenging Road Ahead for Lamb Weston
As the fiscal 2025 approaches, Lamb Weston expects another tough year. The operating environment remains dynamic, characterized by softened global restaurant traffic and reduced demand for frozen potatoes amid ongoing menu price inflation. It anticipates this supply-demand imbalance to persist throughout the fiscal 2025. Input cost inflation will continue to exert financial pressure. In first-quarter fiscal 2025, the company projects a mid- to high single-digit decline in sales, with volume expected to decline mid-single digits. This outlook reflects the ongoing impact of market share losses, weak restaurant traffic and recent voluntary product withdrawals. Margin pressure will be intensified by higher cost per pound, an unfavorable product mix and increased investments in pricing and trade support.
Investors’ Guide for LW Stock
As the fiscal 2025 unfolds, Lamb Weston anticipates another challenging year with ongoing supply-demand imbalances and persistent input cost inflation. The Zacks Rank #5 (Strong Sell) reflects analysts' negative sentiment and expectations of further deterioration in LW’s financial performance. Investors should be cautious and consider these significant challenges when evaluating their investment strategy.
Top-Ranked Staple Stocks
Here, we have highlighted three better-ranked food stocks, namely, The Chef's Warehouse CHEF, Ollie's Bargain Outlet OLLI and Flowers Foods FLO.
The Chef’s Warehouse, which engages in the distribution of specialty food products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.
Ollie's Bargain, the extreme-value retailer of brand-name merchandise, carries a Zacks Rank #2 (Buy). OLLI has a trailing four-quarter earnings surprise of 7.9%, on average. The Zacks Consensus Estimate for Ollie's Bargain’s current financial-year sales and earnings indicates a rise of around 8.7% and 12.7%, respectively, from the year-earlier figures.
Flowers Foods, one of the largest producers of packaged bakery foods in the United States, currently carries a Zacks Rank #2. FLO has a trailing four-quarter earnings surprise of 1.9%, on average. The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and earnings each implies growth of around 1.1% and 4.2%, respectively, from the year-ago reported numbers.
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