In recent years, Lamb Weston has indeed been on the front line facing inflation in agricultural, labor and transportation costs. Its position makes it hard to renegotiate pricing with its clients. Result: margins collapsed, hitting historic lows in 2022 and last year.
The start of the current fiscal year had offered some consolations with hopes of a rebound: volumes held up and the work on cost management seemed effective and conducive to a less painful year than the previous one. Full-year targets had been reaffirmed with authority, even though the context for clients remains marked by declining footfall and industrial overcapacity.
But the second quarter tells a far less reassuring story. Activity remains very fragile. The very modest revenue growth rests almost entirely on volumes and does not offset inflation. In other words, Lamb Weston is trying to keep its clients and its market share, but at the price of concessions on profitability in a highly competitive market. Yet that is precisely the point the market was watching closely and on which it has been strict.
The geographic contrast and market conditions offer little reason to hope for improvement. In North America, the situation remains under control, but internationally (one-third of revenue), it is much more complicated, notably because unit costs are becoming far too high.
The recent rebound in the share reflected investor optimism. But the release falls short and suggests no improvement for the second half of the year. Analysts have revised their expectations several times in recent months. The knife could fall much further.
