Investor Day Highlights (LW)
Lamb Weston hosted an upbeat analyst day yesterday. The company provided additional detail behind its formula for growth. On the top-line management made the case for pragmatic capacity expansion to meet global demand growth. Management presented their reasons to raise prices beyond the costs of potatoes and other ingredients have increased. Lamb Weston’s restaurant customers have raised the prices of French fries above its own increases, demonstrating the favorable elasticity response.
Margins are projected to expand in future years driven by price increases, product mix, and supply chain improvements. SG&A is expected to leverage sales growth. Lamb Weston is in a catch up phase for capital spending, but beyond 2026 9% of sales is targeted with 3% considered maintenance capex. With management comfortable with leverage up to 3.5x from 2.3x currently, the company has potential for a sizable share repurchase program that is not incorporated into its growth formula.
Ostensibly the shares fell yesterday because the company did not commit to a larger share repurchase or outline more near term upside. In our view the shares declined due to the latest GLP-1 news showing success in a kidney disease trial. Regarding GLP-1, management said it was simply too early to see, but noted there have been a multitude of diets in the past two decades and none have altered French fry consumption. Besides a modest valuation and upside to consensus estimates in our model, perhaps the most bullish consideration is the potential for volume growth. Management reiterated their belief that leaving four of the lowest margin contracts are almost entirely responsible for the volume declines. Lamb Weston is a best idea long.
September PPI (HSY)
Overall wholesale prices accelerated for the third consecutive month in September. The overall PPI increased 0.5% month over month and accelerated by 60bps to +2.2% YOY. The PPI for food manufacturing increased 0.5% YOY in September, up from -0.6% in August. Wholesale prices reaccelerating while elasticity is increasing is a bearish margin setup for the food manufacturers.
The PPI for chocolate and confectionery increased 7.0% YOY in September, accelerating from 6.6% in August. Sugar and cocoa beans have increased this year leading Hershey to introduce new prices increases in the 2H of the year. In contrast, most CPG companies are relying on price increases in the 1H for pricing for 2023.
Retail theft (WMT)
Among Civic Science survey respondents that noticed retail theft, 38% said they have been shopping in-person less frequently or are shopping at a different store. Most consumers (53%) have not noticed any change in retail theft. There is a difference geographically with 46% of city-based shoppers changing their shopping behavior compared to 33-35% for rural and suburban-based shoppers. 25% of consumers have noticed changes at multiple stores due to retail theft such as increased security measures or reduced hours and another 23% have noticed it at one or two stores they shop at. 40% of consumers have not seen any changes in the stores they shop at. It’s part of why stores are closing in the cities. Not only has shrink increased, but there are fewer customers. There could be a benefit to shopping online, but less at the low end.
