EAGLE, IDAHO — Protracted weakness in quick service restaurant traffic contributed to meltdown at a major supplier to the sector as shares of Lamb Weston Holdings, Inc. tumbled last week in response to weak financial results and a dimmer 2025 outlook for the major potato product supplier.
Lamb Weston’s share price closed at $56.42 per share in July 24 trading on the New York Stock Exchange, down 28% for the session. A day later the company’s share fell further, to $53.01, a 53% drop from the 52-week high set in January and the lowest price for the stock since December 2021.
In the fourth quarter ended May 26, net income was $130 million, equal to 90¢ per share on the common stock, down 74% from $499 million, or $3.42 per share, a year earlier. Net sales declined to $1.61 billion from $1.69 billion in the previous year’s fourth quarter. Quarterly volume fell 8%.
“This level of execution is unacceptable, and I and my leadership team take full responsibility for operating and financial results,” said Thomas Werner, president and chief executive officer, in a July 24 call with analysts.
The fourth quarter sales of $1.61 billion fell shy of guidance ranging from $1.69 billion to $1.75 billion, a range that had been revised downward by the company in April.
While affirming confidence in management’s strategies, Werner said a recovery in Lamb Weston’s performance will not transpire overnight.
“The operating environment has changed rapidly during fiscal 2024 as global restaurant traffic and frozen potato demand softened,” he said. “In fact, the downward traffic trends accelerated during the back half of the year and into early fiscal 2025. This has led to an increase in available industry capacity in North America and Europe.”
Reacting to the results, the investment bank TD Cowen slashed its price target for Lamb Weston to $61 per share from $105 and downgraded the company to a hold rating from a buy.
“The thesis we laid out last year regarding tight potato processing industry capacity utilization, strong pricing power, and Lamb Weston enhancing its mix by walking away from unprofitable business did not play out,” said Robert Moskow, an analyst with Cowen.
More than half the fourth-quarter volume decline reflected the impact of market share losses and the company’s decision to exit certain lower-price and lower-margin businesses in Europe earlier this year. Another quarter of the volume decline was due to soft restaurant traffic in North America and other international markets. A product recall accounted for the remainder of the decline.
For the full year, Lamb Weston net income fell 28% to $726 million, or $5.01 per share on the common stock, from $1.01 billion, or $6.98 per share, in the previous fiscal year. Net sales increased 21% to $6.47 billion from $5.35 billion. The 2024 fiscal year included $1.11 billion of incremental sales attributable to acquisitions.
In its outlook for the 2025 fiscal year, Lamb Weston expects net sales of $6.6 billion to $6.8 billion and net income of $630 million to $705 million.
“We anticipate the volume will decline during the first half of the year, primarily due to two factors,” said Bernadette Madarieta, chief financial officer. “First, we’ll continue to experience the impact of recent share losses, and second, despite efforts by quick-service and casual-dining chains to improve traffic through increased promotional activity, we expect that restaurant traffic will remain soft for at least the first half of the year as the consumer continues to adjust to the cumulative impact of years of menu price inflation as well as other economic headwinds.”
The guidance was seen as a serious negative by Cowen’s Moskow.
“Lamb Weston’s outlook for fiscal year 2025 indicates significant price concessions to regain market share in a declining volume backdrop,” he said.
In addition to the price concessions, Moskow said prospective weakness in capacity utilization is of concern. He said as recently as three months ago, Cowen was anticipating 95% capacity utilization, based on its discussions with management.
To meet growth that had been anticipated, Lamb Weston and competitors are in advanced stages of completing capacity additions, Moskow said.
“After updating our capacity utilization analysis for North America, we now estimate 87% utilization for calendar 2025 and 84% for 2026, down from a peak of 97% in 2023,” he said.
In North America in the fourth quarter, net sales declined 4% to $1.11 billion from $1.16 billion, and volume declined 7%, with 5 percentage points due to share losses and about 2 percentage points largely attributable to soft restaurant traffic in the United States.
“During our fiscal fourth quarter, overall US restaurant traffic, as well as QSR traffic, was down about 3% versus the prior year,” Werner said. “Traffic at QSR chains specializing in hamburgers, a highly important channel for fry consumption, was down more than 4%.”
In International in the fourth quarter, net sales declined 7% to $499 million from $534 million, and volume declined 9%.
“With our key international markets largely stable and the potential for a tailwind from promotional activity in the US, we believe the pressure on restaurant traffic and demand is temporary and remain confident that the global fry category will return to its historical growth rate as consumers continue to adjust to higher menu prices,” Werner said.