FQ3 Gets ERP'ed (LW)
I’m a buyer on the sell-off after the disappointing FQ3 results. This is far from a broken growth stock. The concerns are transitory. Longer-term EPS power between $7-8 remains, getting us to a $160 stock. EBITDA margins in the quarter were the highest in our model. Lamb Weston has never been cheaper, and the challenges are not nearly as large as some in the past. The ERP issues will be in the rearview, so trends will improve sequentially. The focus will shift to QSR industry trends, which, over time, should be positive.
There were two negative developments that were known but not quantified during FQ3: 1) ERP issues leading to missed sales and 2) the slowdown in the QSR sector, which was highlighted by McDonald’s weakening trends. Lamb Weston reported an FQ3 EPS of $1.20, short of consensus expectations of $1.45. Organic sales decreased 12%, with volumes down 16% and price/mix up 4%. The ERP transition had a larger impact ($95M to EBITDA) than management anticipated. The QSR slowdown led to a $25M charge for the write-off of excess raw potatoes.
Management lowered guidance for sales and EPS due to the ERP impact and “soft near-term restaurant traffic trends.” EPS is now expected to be between $5.50-5.65 from $5.70-6.15. Revenue is now expected to be between $6.54-6.6B from $6.8-7.0B. The company previously had Fx losses of $.01 in the first half of the year, which increased to $.20 in the first three quarters. The outlook for restaurant industry sales is the go-forward challenge. Management believes they have appropriately guided. Production is recalibrating to demand trends. Q4 sales are expected to be flat to up 3% driven by price and offset by a MSD% decline in volumes. There are reasons to expect that guidance to be conservative. All that pricing in QSRs in recent years has finally impacted demand, which will be met with restaurants' readjustments. Lamb Weston is a Best Idea Long. For additional details, please see our separate note.
Q3 Looking for positive growth (CAG)
Conagra reported $.69 vs. $.65. Better gross margins drove the upside. Grocery & Snacks improved sequentially, but the other three segments saw worsening trends.
Refrigerated products saw deflation during the quarter as lower costs were passed through. Grocery & Snacks trends benefited from higher pricing in tomatoes and a comparison in canned meat.
Gross margins expanded by 60bps, while consensus expectations were for a contraction of 90bps. The inflation rate for COGS was 2.9%. Operating margins contracted by 50bps, but were 70bps above expectations.
Management reaffirmed guidance for the year of $2.60-2.65 with one quarter remaining. Management expects volume momentum to continue while maintaining or even expanding gross margins. Conagra is on our short list due to our concerns about volume and margin trends.
Oui Oui (CELH)
Celsius announced plans to partner with Suntory for sales and distribution in France beginning in Q4 with a broader launch in 2025. The company has launched in Canada late in Q1. Celsius has also announced launches in the U.K. & Ireland, Australia & New Zealand for this year. France will be its first non-English speaking country. Celsius is looking to replicate its growth through the health and fitness channel internationally. That approach may is more measured, but the company has been announcing new countries at a fast pace.
