Lamb Weston Holdings, Inc. (LW – Free Report) has experienced an 18.5% decline in its share price over the past six months, raising concerns among investors. This decline is steeper than the 2.3% decline in its industry and the 1.5% deterioration in the broader Zacks Consumer Staple sector. In contrast, the S&P 500 has gained 5.5% during the same period.
The company is facing a set of challenges, including declining global restaurant traffic, increased competition and a tough manufacturing environment. These factors have laid pressure on Lamb Weston, contributing to weaker-than-expected results for the second quarter of fiscal 2025. As a result of reduced demand, management has lowered its financial outlook for the remainder of fiscal 2025.
What’s Behind LW Stock’s Slump?
Lamb Weston is currently facing several challenges, including weak restaurant traffic, heightened competition, overcapacity in the global market and escalating manufacturing costs. The company’s second-quarter fiscal 2025 results fell below expectations due to higher-than-expected manufacturing costs and weaker volumes. The company experienced incremental customer share losses in its North American and International segments, driven by an increasingly competitive landscape. This is particularly visible in markets such as the Middle East and parts of Asia Pacific.
As a result of these challenges, Lamb Weston’s fiscal second-quarter top and bottom lines declined year over year and missed the Zacks Consensus Estimate. The company’s price/mix decreased by 2%, thanks to planned investments in pricing and trade support, pricing adjustments in key international markets due to increased competition and an unfavorable mix of channels and products.
The quarterly volume fell 6% due to weak global restaurant traffic trends, customer share losses offset by gains and the ongoing impact of the company’s strategic decision last year to exit certain lower-priced and lower-margin businesses in Europe. In the North America segment, volume fell by 5%, while volumes in the International segment dropped by 6%.
LW’s Price Performance
Image Source: Zacks Investment Research
Lamb Weston Faces Higher Costs
Lamb Weston is grappling with high costs that are impacting its performance. In fiscal second quarter, the adjusted gross profit decreased by $134.9 million, reaching $343.5 million. This decline was due to increased manufacturing costs per pound, unfavorable price/mix and reduced sales volumes. The increased manufacturing costs per pound were due to input cost inflation, particularly higher raw potato prices, inefficiencies, and increased transportation and warehousing costs. In addition, higher depreciation expenses contributed to the rise in costs.
More Pain Ahead for LW?
Lamb Weston anticipates challenging conditions will persist through the remainder of fiscal 2025 and into fiscal 2026. These challenges are driven by accelerated capacity additions and continued softening in global frozen potato demand, mainly outside North America until demand improves and capacity expansion stabilizes. As a result, Lamb Weston is lowering its financial targets for fiscal 2025.
The company has revised its annual net sales target range to $6.35-$6.45 billion, down from the previous range of $6.6 billion to $6.8 billion. Lamb Weston has lowered its adjusted net income guidance to $440-$460 million, with adjusted earnings per share (EPS) revised to $3.05 to $3.20 for fiscal 2025. Earlier, management had estimated adjusted net income of $600 million to $615 million and adjusted EPS of $4.15 to $4.35.
Advice for Lamb Weston Investors
Lamb Weston’s restructuring plan aims to boost efficiency and profitability, but the company is still grappling with weak demand and rising costs. Given the lowered financial outlook for fiscal 2025 and continued challenges, investors should exercise caution. While long-term growth potential may exist, investors should adopt a conservative approach and wait for clearer signals of recovery before making further investment decisions. At present, LW carries a Zacks Rank #5 (Strong Sell).
Some Solid Staple Bets
We have highlighted three better-ranked stocks from the Consumer Staples sector, namely United Natural Foods, Inc. (UNFI – Free Report) , Ingredion Incorporated (INGR – Free Report) and Freshpet (FRPT – Free Report) .
United Natural currently sports a Zacks Rank of 1 (Strong Buy). UNFI delivered a trailing four-quarter earnings surprise of 553.1%, on average.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for United Natural’s current financial-year sales and earnings suggests growth of 0.3% and 442.9%, respectively, from the year-ago period’s reported figure.
Ingredion Incorporated manufactures and sells sweeteners, starches, nutrition ingredients and biomaterial solutions derived from wet milling and processing corn and other starch-based materials. The company currently carries a Zacks Rank #2 (Buy).
INGR has a trailing four-quarter earnings surprise of 9.5%, on average. The Zacks Consensus Estimate for Ingredion’s current financial year’s earnings indicates growth of 12.4% from the year-ago reported number.
Freshpet, a pet food company, presently carries a Zacks Rank #2. FRPT has a trailing four-quarter earnings surprise of 144.5%, on average.
The Zacks Consensus Estimate for Freshpet’s current financial-year sales and earnings suggests growth of 27.2% and 228.6%, respectively, from the year-ago period’s reported figure.
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