Lamb Weston to the Long Bias list (LW)
We are moving Lamb Weston from the Short Bias list to the Long Bias list. Shares of Lamb Weston are down 23% YTD and are still down since reporting the last Q. Our reasons for having Lamb Weston on the short bias list included concern about the company's exposure to the foodservice channel, the sudden drop in demand in the restaurant channel, potential for disruptive pricing, fixed cost deleverage, and supply challenges in the retail channel.
Recovery trade
Lamb Weston does not have any close publicly traded comparables. Still, restaurant distributors (USFD, SYY, PFGC) had rallied since July when restaurant sales started to experience steady week over week improvement. Lamb Weston has roughly 60% of its sales with QSRs, which have seen strong sales growth domestically during the pandemic driven by their drive-thru windows. Internationally, QSR sales have trended like casual dining sales due to the lack of drive-thrus. 15% of Lamb Weston's sales are through the retail channel, which has also seen strong demand growth during the pandemic. The remaining ~25% of sales in foodservice ex QSR continues to be challenged by depressed demand from schools, hotels, events, offices, and indoor dining capacity constraints.
A challenging environment for suppliers
According to a recent study by Washington State University, Washington state's potato industry faces losses of $1B. Washington is the second-largest producing state (Idaho is 30% larger). Potatoes have been hit particularly hard by the decline in foodservice sales during the pandemic. Acreage for the 2020 fall harvest dropped 13%, which represents 729,000 tons of potatoes. About 50% of the state's fresh potato sales and 95% of processed potato sales are to the foodservice sector. Potato prices in September are down considerably YOY and month over month.
Looking out to 2021
Unlike most food companies, Lamb Weston included COVID-19 costs in its reported results. Half of those costs were characterized as non-recurring. As we look out to next year, Lamb Weston will see a competitive environment in which capacity will be shorter than supply with the industry's reaction to shut down production lines. We expect the company's utilization to be at the upper end of its range, boosting gross margins next year.
Possible revaluation
We have not seen the disruptive pricing we were concerned about despite the shock to demand and excess supply conditions. If Lamb Weston can demonstrate pricing power in 2021 as the market recovers, shares could see $90 again.
Our updated position monitor is as follows:
Grocery spending rebounds (ACI)
For the week ended September 6, CPG demand rebounded to +16% from +5% the previous week, as seen in the chart below. Growth was driven across all departments but was led by the alcoholic beverages and frozen departments, which have been the leaders for most of the pandemic. Alcohol beverage demand increased to +33% from +1% the prior week due to the timing of the Labor Day weekend. Last week Kroger said that ID sales were still up DD% in the five weeks since the end of July.
Albertsons repurchased 6.8M shares from Gabriel Assets at $12 per share. The company said it was an opportunistic move as the seller was subject to a court-mandated shut-down.
UK grocery spend a flat week over week (NOMD)
For the week ended September 5, total CPG demand remained at +6% for the second consecutive week, as seen in the following chart. Frozen food improved to +9% due to strength in ice cream from +4% the previous week. Sales of frozen pizza and frozen fish fell. Schools across the UK have fully re-opened, which will alter lunch meal consumption. The UK is Nomad Food's largest country by sales, representing 31% of overall sales.
