Narrow-Moat Lamb Weston Closes Its Book With Record Q4 Sales; Shares Overvalued

We think Lamb Weston’s ability to wield pricing power in its entrenched restaurant relationships was the primary driver in its record fourth-quarter sales. Net sales growth clocked in at 14%, with 15% from price/mix but negative 1% impact from volume. We aren't discouraged by the slight downdraft in volume given the shipping container shortage (resulting in a 10% drop in export volumes, though better than last quarter’s 20% drop) that prevented the firm from fully satisfying the demand. Quick service restaurant traffic remains resilient (representing 80% of fry servings, per management), though at the expense of softening casual dining and restaurant traffic due to inflationary pressures. In this context, we do not expect a noticeable pullback in QSR demand even with the looming recessionary concerns. Rather, we anticipate the fry attachment rate to hold up in line with the historical levels, aiding Lamb Weston’s top line to grow by mid-single-digit percentages longer-term.