Potato products company Lamb Weston (NYSE:LW) reported Q1 FY2024 results exceeding Wall Street analysts' expectations, with revenue up 47.9% year on year to $1.7 billion. Its full-year revenue guidance of $6.9 billion at the midpoint also came in slightly above analysts' estimates. Turning to EPS, Lamb Weston's GAAP profit of $1.60 per share was flat year on year.
Lamb Weston (LW) Q1 FY2024 Highlights:
- Revenue: $1.7 billion vs analyst estimates of $1.6 billion (3.2% beat)
- EPS: $1.60 vs analyst estimates of $1.08 (48.1% beat)
- Free Cash Flow of $67.3 million, down 66.7% from the previous quarter
- Gross Margin (GAAP): 30%, up from 24.3% in the same quarter last year
- Organic Revenue was up 48% year on year
- Sales Volumes were up 25% year on year
Best known for its Grown in Idaho brand, Lamb Weston (NYSE:LW) produces and distributes potato products such as frozen french fries and mashed potatoes.
The company was founded in 1950 and began as a small regional supplier of frozen potato products in the Pacific Northwest. Over the subsequent decades, Lamb Weston merged with and was spun off from Conagra.
Today, Lamb Weston's product portfolio still centers around potato products, whether it be frozen curly fries or potato chips of various cuts and textures. The company goes to market with its Grown in Idaho and Alexia brands, selling both to individual consumers as well as restaurants and food service businesses.
As such, Lamb Weston’s core customers can be the global fast-food chain with fries on the menu or the mom/dad that does the grocery shopping for the family. Either way, both these customers want a dependable brand that offers convenience and competitive prices. For the retail customer, Lamb Weston products can be found at supermarkets, regional grocery stores, and large general merchandise retailers that sell food.
Packaged Food
As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences. The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.
Competitors offering frozen or potato-based packaged foods include Hormel Foods (NYSE:HRL), Conagra Brands (NYSE:CAG), Kraft Heinz (NASDAQ:KHC), and private company McCain Foods.Sales Growth
Lamb Weston is one of the larger consumer staples companies and benefits from a well-known brand, giving it customer mindshare and influence over purchasing decisions.
As you can see below, the company's annualized revenue growth rate of 17% over the last three years was excellent as consumers bought more of its products.
This quarter, Lamb Weston reported magnificent year-on-year revenue growth of 47.9%, and its $1.7 billion in revenue beat Wall Street's estimates by 3.2%.
Volume Growth
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
To analyze whether Lamb Weston generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.
Over the last two years, Lamb Weston's average quarterly volume growth was a robust 5%. Even with this splendid performance, we can see that most of the company's gains have come from price increases by looking at its 25% average organic revenue growth. The ability to sell more products while raising prices indicates Lamb Weston enjoys inelastic demand. 
In Lamb Weston's Q1 2024, sales volumes jumped 25% year on year. This result was a well-appreciated turnaround from the 5% year-on-year decline it posted 12 months ago, showing the company is heading in the right direction.
Gross Margin & Pricing Power
All else equal, we prefer higher gross margins. They usually indicate that a company sells more differentiated products and commands stronger pricing power.
This quarter, Lamb Weston's gross profit margin was 30%. up 5.7 percentage points year on year. That means for every $1 in revenue, a chunky $0.70 went towards paying for raw materials, production of goods, and distribution expenses. 
Lamb Weston has weak unit economics for a consumer staples company, making it difficult to reinvest in the business. As you can see above, it's averaged a 25.7% gross margin over the last eight quarters. Its margin, however, has been trending up over the last 12 months, averaging 29% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment.
Operating Margin
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
This quarter, Lamb Weston generated an operating profit margin of 19.4%, up 5.5 percentage points year on year. This increase was encouraging, and we can infer Lamb Weston had stronger pricing power and lower raw materials/transportation costs because its gross margin expanded more than its operating margin.
Zooming out, Lamb Weston has exercised operational efficiency over the last eight quarters. The company has demonstrated it can be one of the more profitable businesses in the consumer staples sector, boasting an average operating margin of 15.6%. On top of that, its margin has improved by 5.5 percentage points on average each year, a great sign for shareholders. The company's operating profitability was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes tectonic shifts to move meaningfully. Companies have more control over their operating margins, and it signals strength if they're high when gross margins are low (like for Lamb Weston).EPS
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q1, Lamb Weston reported EPS at $1.60, in line with the same quarter a year ago. This print beat Wall Street's estimates by 48.1%.
Between FY2021 and FY2024, Lamb Weston's adjusted diluted EPS grew 132%, translating into an astounding 44.1% average annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).
Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 11.2% year-on-year increase in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Lamb Weston's free cash flow came in at $67.3 million in Q1, down 26% year on year. This result represents a 4% margin.
Over the last two years, Lamb Weston has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 1.4%, slightly better than the broader consumer staples sector. However, its margin has averaged year-on-year declines of 2.2 percentage points. If this trend continues, it could signal that the business is becoming slightly more capital-intensive.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Over the last five years, Lamb Weston had a solid track record of investing in profitable projects and is more likely to get better terms with financiers if it wants to raise or borrow capital today. Its five-year average ROIC was 14.7%, higher than most consumer staples companies.
Key Takeaways from Lamb Weston's Q1 Results
Sporting a market capitalization of $13.6 billion, more than $163.3 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Lamb Weston is attractively positioned to invest in growth.
We were impressed by how significantly Lamb Weston blew past analysts' EPS expectations this quarter. We were also excited its gross margin outperformed Wall Street's estimates. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The stock is up 2.5% after reporting and currently trades at $98.57 per share.
Is Now The Time?
Lamb Weston may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We think Lamb Weston is a good business. First off, its revenue growth has been impressive over the last three years. And while its gross margins indicate a disadvantaged starting point for the overall profitability of the business, its organic sales have surged over the last two years. On top of that, its marvelous sales volume growth has been in a league of its own.
Lamb Weston's price-to-earnings ratio based on the next 12 months is 17.3x. There are definitely a lot of things to like about Lamb Weston, and looking at the consumer staples landscape right now, it seems to be trading at a reasonable price.
Wall Street analysts covering the company had a one-year price target of $118 per share right before these results, implying that they saw upside in buying Lamb Weston even in the short term.
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