Lamb Weston Holdings, Inc. - NYSE:LW - Comprehensive analysis
From early April to late July 2024, Lamb Weston shares experienced a significant decline, falling by 50% following two disappointing quarters. In its fiscal third quarter of 2024 (ending February), the company faced challenges due to a problematic rollout of a new enterprise resource planning (ERP) system, which resulted in inaccurate inventory estimates at distribution centers. This led to decreased customer fulfillment rates, loss of market share, and inventory write-offs. However, in its fiscal third quarter of 2025 (ending February), Lamb Weston reported improvements, with higher sales and wider profit margins. Notably, the company managed to regain market share lost during the previous year's ERP rollout.
Despite this progress, sluggish restaurant traffic continues to hinder a more robust near-term recovery. Additionally, the industry is currently undergoing an investment cycle aimed at expanding capacity, which poses risks to Lamb Weston's utilization rates and margins in the longer term. The outlook for the near to medium term remains uncertain, as these challenges are not expected to resolve quickly. Nevertheless, long-term valuation catalysts are still in place, with shares trading nearly 40% below our fair value estimate.
Even amid declining traffic, attachment rates for fries remain high, and fries continue to be one of the most profitable menu items for restaurants. As consumers adjust to stabilizing inflation, we anticipate a return to typical mid-single-digit growth in fry sales. Furthermore, while the company is contending with short-term excess capacity, we believe that long-term demand growth and industry capacity rationalization will help restore utilization rates to the high-90% range.
Lamb Weston's recent struggles have also drawn acquisition interest from Post Holdings, as well as the involvement of activist investors Jana Partners and Continental Grain, who collectively own over 5% of the company's shares and are advocating for significant changes. Under the leadership of CEO Michael Smith, who previously served as COO under former CEO Tom Werner, Lamb Weston has adopted a more collaborative approach with these activists. An acquisition at an appropriate price or changes driven by activist investors could serve as near-term catalysts for the company. Additionally, Lamb Weston has engaged Alix Partners to explore potential operational improvements, indicating a path for meaningful upside.
Importantly, the challenges related to traffic and the ERP system do not diminish Lamb Weston's cost advantage or the strength of its intangible assets. The company's supply chain is heavily concentrated in the low-cost Columbia Basin and Idaho, where high yields result in costs that are 10%-20% lower per pound. Although Lamb Weston has lost some market share due to its ERP issues, we believe its customer relationships remain robust, as demonstrated by its ability to recapture lost share.
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