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McCormick (MKC) Continues Focus on Cost Savings

Zacks Equity Research

On Aug 26, 2014, we issued an updated research report on McCormick & Co, Inc. (MKC).

On Jun 26, the global leader in flavors and spices reported second quarter fiscal 2014 earnings.

Earnings of 64 cents per share beat the Zacks Consensus Estimate of 62 cents by 3.2% and increased 8% from the year-ago earnings of 59 cents per share owing to top-line growth, cost saving initiatives, higher operating income and lower tax rate and share count.

Sales grew 3% year over year, mainly driven by the acquisition of Wuhan Asia-Pacific Condiments (:WAPC) (acquired in May 2013). The WAPC acquisition has enhanced McCormick’s product portfolio with new flavors and expanded its presence in the central regions of China. Both the consumer and industrial business segments witnessed an increase in sales in the quarter. However, the Americas region continued to remain soft in the consumer segment due to increased competitive pressure. Sales lagged the Zacks Consensus Estimate by 1.3%. (Read: McCormick Beats on Q2 Earnings; Re-Affirms View)

McCormick’s industrial business has been struggling since the last few quarters owing to sluggish demand from quick service restaurants, primarily in the U.S and Asia. In the U.S., quick service restaurants witnessed lower traffic and emphasized on menu items that do not use McCormick flavors. In Asia, demand was impacted by consumer concern about bird flu in China.

Though demand in Asia improved in the second quarter, which led to an improvement in industrial business sales, the company continued to witness soft sales in the Americas region due to ongoing weakness in quick service restaurants.

Moreover, currency headwinds, slow economic recovery in the U.S. and ongoing sluggishness in quick service restaurants create overhangs.

Nevertheless, we are encouraged by McCormick’s increasing focus on saving costs and enhancing productivity through its ongoing initiative, Comprehensive Continuous Improvement (‘CCI’) program, which started in 2009. Cost savings from McCormick's CCI program and favorable mix (due to higher sales of higher margin industrial products) pushed up the gross margin by 60 basis points in the second quarter. Operating income also improved 5% to $122 million driven by top-line growth and improved gross margin.

The company expects annual cost savings of at least $45 million over the long-term. In addition, McCormick’s productivity improvements, product innovation and expansion in emerging markets also remain the strengths of the company.

The company has a Zacks Rank #3 (Hold).

Key Picks from the Sector

Better-ranked stocks in the food industry include Aramark (ARMK), Treehouse Foods, Inc. (THS) and Pinnacle Foods, Inc. (PF). While Aramark and Treehouse sport a Zacks Rank #1 (Strong Buy), Pinnacle Foods holds a Zacks Rank #2 (Buy).

Read the Full Research Report on MKC
Read the Full Research Report on PF
Read the Full Research Report on ARMK
Read the Full Research Report on THS

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