In order to further improve productivity across the organization, McCormick & Co. Inc. (MKC) has introduced several initiatives in the Europe, Middle East and Africa (:EMEA) region as part of its Comprehensive Continuous Improvement program (CCI).
Started in 2009, McCormick’s CCI program has helped the company to focus on reducing costs and enhancing productivity. The company has used the CCI savings to increase its investments, thereby leading to increased sales, operating income and profit. The company’s long-term annual growth objectives are to increase sales in the range of 4% to 6%, operating income in the range of 7% to 9% and earnings per share in the range of 9% to 11%. CCI cost savings reached $56 million in fiscal 2012, well above the company’s expectation of saving at least $40 million. In 2013, the company expects to deliver at least $55 million of additional cost savings.
McCormick has chosen the EMEA region, as it has meaningfully contributed to the company's CCI goals. The company is thus keen on further improving productivity in this region that would also support long-term growth. The company has taken some initiatives such as the closure of the company's current operations in The Netherlands and streamlining selling, general and administrative costs, including the centralization of shared service activity across the region into Poland.
These initiatives will help in achieving annual cost savings of approximately $10 million by 2015. This will contribute to the company's long-term goal of achieving at least $45 million in annual CCI-related cost savings.
The CCI-related charges are expected to lower fiscal 2013 reported earnings by approximately 14 cents. Management now expects its GAAP earnings guidance for 2013 to be at the lower end of the range of $2.89 to $2.95 per share. Excluding CCI-related charges, the company reaffirmed its adjusted earnings outlook at the lower end of its $3.13 to $3.19 range. McCormick continues to expect adjusted operating income to grow 3% to 5% for fiscal 2013.
In the recently concluded third-quarter fiscal 2013 results, McCormick’s cost savings along with top-line growth led to operating income growth of 3%. Earnings were in line with the Zacks Consensus Estimate and the year-ago earnings. Higher operating income and lower share count were largely offset by a tax rate increase in the quarter.
We note that McCormick’s earnings and sales have remained under pressure from the past few quarters due to sluggish demand from quick service restaurants, primarily in the U.S. and Asia. In the U.S., quick service restaurant demand was soft due to focus on menu items not flavored by McCormick, while in Asia demand was adversely impacted by bird flu concerns in China.
While we believe that the company’s initiatives in the EMEA region will boost cost savings and help earnings growth over the quarters, we remain on the sidelines over the growing concerns in the industrial business. McCormick currently holds a Zacks Rank #3 (Hold).
Other specialty food companies which are better positioned and warrant a look include Green Mountain Coffee Roasters, Inc (GMCR), Pinnacle Foods Inc (PF) and The J.M. Smucker Co. Inc (SJM), all of them carrying a Zacks Rank #2 (Buy).