Lamb Weston reported FQ1 EPS of $1.63, significantly ahead of consensus expectations of $1.08. The upside was driven primarily by better gross margins.
Sales
Total sales grew 48%, driven by the recent acquisitions. Organic sales growth was 15%, with price/mix of +23% and volume of -8%. North American sales grew 19%, with price/mix of 24% and volume declines of 5%. Management believes that lower-than-expected trade spending was a couple of percentage points benefit. Management believes it could be timing related which would shift the trade spending to FQ2. Lower freight charges, which are passed onto customers, were a 2% point headwind. Inventory destocking was also a headwind but is not expected to continue going forward. International sales grew 212% due to the acquisitions or decreased 9% organically. Price/mix was up 18%, and volumes decreased 27%. The decline was mostly due to exiting low-margin accounts. Management said 90% of the volume decline was from exiting low-margin contracts, and 10% was from destocking. Management said the fry attachment rate remained stable and above pre-pandemic levels.
The company exited four contracts that were low margin, but the company will look to replace those customers. In North America, customer contracts representing 20% of the business are still being renegotiated while the remainder have already been repriced or have contractual increases. (The 20% being repriced is a growth driver.) Management said the volume impact from higher prices has been small. Volume trends are expected to improve as the year progresses.
Margins
Gross margins expanded by 480bps, driven by higher pricing, improved mix, and productivity improvements partially offset by higher input costs and the European acquisition. The step-up inventory valuation from the European JV acquisition was a $.11 cost, while mark-to-market adjustments for commodity hedging were a $.16 gain compared to a $.02 loss last year. Less trade spending in FQ1 was estimated to be a 200bps benefit.
Per pound, input costs rose mid to high-single-digits due to higher potato prices, labor, energy, and coating ingredients. Lower freight, edible oils, and productivity were gross margin tailwinds. Input cost inflation is still expected to be up M-HSD% driven by potato inflation of 20% in the U.S. and 35-40% in Europe. Management’s expectations for the potato crop in the U.S. remain the same but have improved in Europe.
SG&A costs increased 39% due to the acquisitions, ERP implementation, higher compensation and benefits, higher advertising, and higher promotion expenses. EBIT more than doubled.
Outlook
Management raised the EPS outlook for F2024 to $5.50-5.95 compared to consensus of $5.35. Sales guidance was raised from $6.7-6.9B to $6.8-7.0B, which represents organic growth of 6.5-8.5% largely driven by pricing. Pricing is expected to decelerate FQ1 to a LDD% rate for the year. Volumes are expected to be down organically MSD% for the year and improve sequentially as the company exits certain lower-margin customers and products. Positive volume trends in the 2H of the year would be a notable outlier in the Consumer Staples sector.
The company repurchased $100M of shares “opportunistically” during August. The shares currently are only slightly higher than what management viewed as an opportunistic price.
Historically, entry points when the shares have been below 12x EBITDA have led to outperformance. The valuation returning to a historical premium from a discount currently represents an upside of 50%+. Lamb Weston is a Best Idea Long.
