Spice and flavorings giant McCormick & Company (NYSE: MKC) is set to release fiscal second-quarter 2019 earnings results on June 27 before the open of trading. Despite volatility earlier in the year, McCormick shares have gained 12% so far in 2019 as investors have gained comfort with the company's recent steady state of slim but dependable revenue and earnings growth. Below, let's look at three focus areas that will yield fruit upon inspection for investors when the report is filed next week.
Progress against the full-year plan
McCormick reported 1% year-over-year revenue growth in the first quarter of fiscal 2019, to $1.23 billion. In constant currency terms, the company's top line advanced by 4%. Adjusted earnings per share improved by 12% to $1.12.
This top- and bottom-line performance fell in line with management's fiscal 2019 expectations. The consumer packaged goods (CPG) conglomerate anticipates that current-year revenue will improve by 1% to 3% over fiscal 2018, which equates to 3%-5% growth in constant currency terms.
Adjusted operating income for the year is slated to advance by 9% to 11% in constant currency terms against the $930 million in adjusted operating income the company booked in fiscal 2018.
Management expects adjusted earnings per share to land between $5.17 and $5.27, which will mark a growth rate of 4% to 6%, or 6% to 8% when adjusted for foreign currency translation. As you can see, net earnings are set to expand at a lower rate relative to operating income; this is mostly due to a higher expected effective tax rate in fiscal 2019.
Since McCormick's business isn't subject to outsized seasonal swings, shareholders can expect that both its second-quarter top and bottom lines will fall within the full-year percentage ranges when compared to the second quarter of fiscal 2018.
Image source: Getty Images.
Consumer stability versus flavorings momentum
To build organic growth in a band of 3% to 5% in the second quarter, McCormick will most likely reveal a segment performance pattern similar to Q1. That is, low single-digit sales growth in the consumer segment will be supported by mid-single-digit flavorings segment expansion.
In the first quarter, consumer sales advanced by 3%, while flavorings sales popped by 6% -- both in constant currency terms. The flavorings business is benefiting from higher quick-service restaurant sales, growing snack flavoring sales to fellow CPG multinationals, food service expansion, and a widening footprint in emerging markets.
During the company's first-quarter earnings conference call, CEO Lawrence Kurzius also cited the additions of the acquired Frank's RedHot hot sauce, French's Mustard, and Cattlemen's barbecue brands to institutional sales in the flavorings category as a recent growth catalyst.
McCormick is hoping to kick-start sales momentum in the consumer segment through a number of avenues in the first half of fiscal 2019, including the addition of premium salts and peppers to its McCormick Gourmet spices in the U.S. and a new line of Zatarain's packaged meal products dubbed "Zatarain's Garden District Kitchen." McCormick shares will potentially respond positively if the company is able to push its consumer sales advance beyond the low single-digit range this quarter.
Progress on profitability initiatives
In addition to breaking down top-line progress, shareholders should check on the status of two distinct profitability initiatives -- one a long-standing effort, the other a relatively new project. The first is the company's muti-year "CCI" (Comprehensive Continuous Improvement) productivity program. In fiscal 2018, McCormick realized cost savings of $118 million through CCI efforts -- an amount equal to 3% of its total expenses for the year. In fiscal 2019, the organization is seeking to save another $110 million via various logistics, supply chain, and general and administrative productivity measures, which in sum should boost gross margin by 25 to 75 basis points.
The second initiative is the company's plan to hold its brand marketing spends equal to 2018 levels. Management is aiming to promote higher marketing efficiency by tightening up on growth in brand marketing investments. As CEO Kurzius observed last quarter, this will rely in part on a savvier use of social media to wring more impact out of a static level of marketing dollars. Again, evidence of ongoing success in this endeavor will improve the attractiveness of McCormick shares. Look for company executives to discuss marketing spend efficacy on the second-quarter earnings call.
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