Lamb Weston Earnings: Strong Execution and Top-Line Momentum Encouraging but Shares Overcooked

Narrow-moat Lamb Weston LW booked solid (August-ended) fiscal 2024 first-quarter results as its organic net sales shot up 15% and its adjusted operating margin improved 590 basis points to 19.8%. A favorable mix and higher prices contributed 23% sales growth, but volume fell 8%. While the volume decline in its international arm (32% of sales) was particularly pronounced, slipping 27%, we don’t think this mark raises a red flag. For one thing, management attributed the bulk (90%) of the decline to the firm’s decision to exit select lower-priced and lower-margin contracts abroad. For another, inventory destocking activities by certain customers partially impaired its volume, but we don’t anticipate that this will prove to be a drag. Reflecting its strong results and outlook, management lifted its full-year net sales guidance to $6.8 billion-$7.0 billion from $6.7 billion-$6.9 billion and its diluted EPS guidance to $5.47-$5.92 from $4.95-$5.40. We intend to move our near-term forecasts into the new guided range. Although this should bump up our $74 fair value estimate by a high-single-digit rate—in line with the shares’ uptick after the report—the stock remains expensive, so we continue to encourage investors to await a more attractive entry point.

Though near-term volume prospects continue to look challenging, with overall restaurant traffic in Lamb Weston’s key markets falling 1% sequentially during the firm’s first fiscal quarter, fries remain a surprisingly resilient attach item in restaurant end markets. Consequently, while we anticipate that sluggish restaurant traffic will persist in the near term given a spate of pressures on consumers’ pocketbooks, such as elevated interest rates and increased gas prices, we expect fry attachment rates to stay resilient, as it has during past economic downturns. All in, we maintain our forecasts for mid-single-digit average top-line growth beyond fiscal 2024 and high-teens operating margins through fiscal 2032.