Looking at the Lamb Weston chart, an investor might think that the potato producer is simply facing the same problems as the rest of the food sector. Like many manufacturers in the space, the company benefited from inflation in 2022, and saw its share price reach multiyear (in fact, all-time) highs in early 2023.
Since then, however, the stock has followed the industry down. Last month, shares reached their lowest levels since just weeks after the company was spun off from Conagra in late 2016.
To be sure, industry pressures are playing a role. A disastrous fiscal 2024 was driven in part by falling traffic at key customers. (Among those customers, most famously, is McDonald’s; Lamb Weston produces the chain’s French fries, and the contract accounts for about 15% of its revenue.)
But the struggles at Lamb Weston extend beyond broader customer weakness. Two key problems have driven what is now a greater than 60% decline in the company’s stock price. And the first is one more typically associated with a very different industry.
Lamb Weston’s Surge and Stall
After Lamb Weston became independent nearly a decade ago, investors clamored to own the company. Shares rose roughly 150% in two years – in essentially a straight line up. And it wasn’t difficult to see why the market was so optimistic.
Lamb Weston had strong profit margins, steady demand, and a relatively concentrated market. (The ‘Big Four’, which also includes privately held McCain, Simplot, and Cavendish Farms control roughly 95% of production.) Competition was relatively rational (perhaps too rational in retrospect: the industry is being investigated for alleged price-fixing). It was nearly impossible to imagine American consumers abandoning the ubiquitous French fry, and international markets offered the promise of growth.
Yet from the jump, some investors were skeptical. The bearish argument was that Lamb Weston was not a high-margin producer of finished products – but instead a cyclical commodity supplier simply benefiting from a boom period.
The late 2010s, with low inflation, a solid economy, and even above-average potato crops, was simply a banner time for the industry as a whole. In the pessimistic reading, Lamb Weston’s growth during that period was simply the result of an upward cyclical swing, rather than proof of a structurally attractive business with years of growth ahead.
In other words, Lamb Weston’s business was more like that of an oil driller than a food manufacturer. The boom/bust cycle in oil is so well-known that it has inspired books, movies, and television shows. In that industry, higher prices lead to above-average margins and attractive cash flow. As a result, the industry ramps production to capture those profits. Supply surges, inevitably demand weakens, and prices plunge.
Producer of French Fries Learning Hard Lessons
At the well-regarded Sohn New York Idea Contest in 2019, the ‘best short idea’ award in fact went to an investor who laid out precisely this bear case for Lamb Weston. As the market saying goes, short sellers (who borrow a stock to sell it, thus betting on a price decline) are “sometimes right, sometimes wrong, but always early.” Here, bears were both right and early (though the pandemic, and the resulting spike in demand for away-from-home food including French fries, obviously changed the thesis).
Particularly after the post-pandemic spike, the industry (including Lamb Weston) began building out huge amounts of capacity. And so, when consumer weakness hit, producers were oversupplied. Pricing competition followed, and Lamb Weston’s profit margins plunged.
In fiscal 2019, the company’s Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins were 24%, among the best in the industry. This year, Lamb Weston expects EBITDA margins of just 17%. The bear case – that Lamb Weston is a commodity play, not a branded business – seems to have played out.
But there is another factor as well: abysmal strategy and execution.
Over the past two years, Lamb Weston has seen major investments from not one, but two, activist funds that look to own and improve struggling businesses. They have had plenty to criticize.
A disastrous implementation of an ERP (enterprise resource planning) software system has taken a decade and still hasn’t been completed. Errors in the transition led the company to lose tens of millions of dollars in sales in fiscal 2024. As an activist noted, fiscal third quarter earnings that year were so bad that a veteran Wall Street analyst called the report “one of the worst days for a larger-cap food producer in modern history.”
Spending on new plants and new capacity backfired. An inability to forecast demand led the company to buy, and then toss, tens of millions of dollars’ worth of potatoes. When prices were high, according to multiple reports Lamb Weston walked away from business if customers balked – only to run back to those former customers with discounts when the market turned.
Lamb Weston Resets Strategy
The fact that international growth disappointed – overseas customers haven’t adopted French fries the way the company and some investors believed they would – has only added to Lamb Weston’s problems.
So this isn’t just a story of a food manufacturer struggling with faded brands and a stretched consumer. And, in a sense, that’s good news – because it does give Lamb Weston room to get its business back on track. Capacity is being rationalized, costs are being cut, and management says it’s focused squarely on better execution. McDonald’s remains loyal, and at least for Americans demand for French fries remains steady (at least at the right price).
And perhaps most importantly, the cycle will turn.
If the past decade proved that Lamb Weston is the cyclical business skeptics believed, that does suggest that at some point in the next decade, the cycle should swing back in its favor. The question, then, might be whether management can get the business healthy enough to take advantage when that happens.
Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites for more than a decade; he’s currently the lead writer for Wall Street & Main. As of this writing, he has no positions in any companies mentioned.
The Food Institute Podcast
In this episode of Food for Thought Leadership, Food Institute Chief Content Officer Kelly Beaton steps in as guest host to interview Fransmart CEO Dan Rowe on the evolving restaurant labor market. Rowe challenges operators to view labor not as a cost to minimize but as a strategic investment, noting that the most successful brands are those that “staff for the sales they want” and prioritize retention, engagement, and culture amid ongoing workforce constraints.
