What happened
Shares of food maker Lamb Weston (LW -1.21%) took off at the start of trading on Thursday, swiftly rising by 13.5% or so. The big news was the company's fiscal second-quarter 2022 earnings report, which it released before the market opened. On the surface, the news wasn't that good, but when you look past the actual earnings figure, things start to look a lot better.
So what
Potato-based foods comprise Lamb Weston's biggest product line, and while that isn't a particularly exciting segment, it's one that is a major staple for restaurants. The coronavirus has been a material headwind on that front, given that restaurants were largely shut down at one point early in the pandemic and, while most are open now, people's ongoing efforts to avoid exposure to COVID-19 continue to impact customer traffic. Add in the impact of the recent surge in inflation, and it's hardly shocking that Lamb Weston's adjusted earnings were down 24% year over year to $0.50 per share.
One might expect that bad news like that would lead to a stock price decline, but, as noted, shares of Lamb Weston rose in early trading, and were still up by 9.6% as of 11:41 a.m. ET.
Image source: Getty Images.
The likely reason for that gain is that Lamb Weston's top line grew by 12% year over year in the fiscal quarter, which ended Nov. 28, thanks to strong demand from the foodservice segment. Also contributing to the revenue rebound were price increases, which are helping the company offset rising costs.
The company's foodservice division is its second-largest business unit, and generally supplies smaller restaurants. The unit's sales increased 30% in the quarter; 22 percentage points of that was due to volume gains, while the rest came from price increases. Lamb Weston's larger global division, which supplies the biggest restaurant chains, saw a more modest sales increase of 9%, four percentage points of which were related to higher volume and the rest coming from price hikes. Basically, the largest restaurants held up well, but smaller ones look like they are starting to come back to life again. That's good news, and suggests that Lamb Weston, while still dealing with material headwinds, is still benefiting as the world recovers from the early pandemic hit.
Now what
The company's outlook for the rest of its fiscal 2022 was a bit mixed. Management noted that demand is likely to continue improving even as price increases work through the system and help boost the top line. That said, margin pressures are likely to remain a notable headwind thanks to inflationary pressures and staffing constraints. Still, the big takeaway from Lamb Weston's earnings update appears to be that it is working its way through a tough patch relatively well. Or at least, that's what it seems investors got from the release, based on the stock price bounce.
