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McCormick (MKC) Poised on Pandemic-Led Demand, Hurt by Costs

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McCormick & Company, Incorporated MKC is benefiting from prudent acquisitions and robust product innovations. Also, the company is witnessing higher consumer demand, stemming from escalated at-home consumption and more cook-at-home amid the pandemic. Apart from these, its cost-saving initiatives are providing a breather amid pandemic-led expenses.

Coronavirus-Led Demand Fuels Growth

Burgeoning demand amid the pandemic bolstered McCormick’s first-quarter fiscal 2021 results, with sales and earnings surpassing the Zacks Consensus Estimate and increasing year over year. Markedly, sustained shift in consumers’ behavior toward increased cook and eat at-home amid the coronavirus outbreak fueled demand in the Consumer segment. Moreover, increased sales to packaged food companies drove growth in the Flavor Solutions segment. Sales in the Consumer and Flavor Solutions segment increased 35% and 4%, respectively, during the quarter.

Based on solid first-quarter performance as well as favorable impact of the recent bond issuance to optimize long-term financing, McCormick raised its fiscal 2021 view. The company now expects to achieve sales growth of 8-10% (up 6-8% at constant currency) compared with the prior-year’s figure. Earlier, management had expected to achieve sales increase of 7-9% (up 5-7% at cc). Further, adjusted earnings per share are now expected in the range of $2.97-$3.02, which suggests a rise of 5-7%. Earlier, management had projected the metric in the range of $2.91-$2.96.

Acquisitions & Innovations Driving Growth

McCormick strategically increased its presence through acquisitions to expand portfolio. In Dec 2020, McCormick announced that it has bought 100% stake in FONA International, LLC and some of its affiliates. FONA’s diverse portfolio will help McCormick bolster its value-add offerings and expand the flavor solutions segment into attractive categories. During the same month, it completed the acquisition of the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand. McCormick believes that the buyout of Cholula accelerates its growth potential across the condiment platform and widens the product portfolio in the hot sauce category.

Further, the company's acquisition of the food division of RB Foods (concluded in Aug 2017) is noteworthy in this regard. With iconic brands like Frank’s RedHot, French’s and Cattlemen’s, RB Foods is likely to continue being a profitable asset for McCormick’s flavor portfolio.

Additionally, McCormick regularly enhances products through innovation to remain competitive and tap the evolving demand for new flavors, spices and herbs. Aided by a sturdy brand image, McCormick enjoys strong retail acceptance for new products. Notably, new product launches are an important part of the company’s growth. Management, in its last earnings call, highlighted that the company’s exceptional product launches in 2020 are providing solid momentum during the year. Moreover, management is optimistic about its strong product pipeline for 2021.

Hurdles on Way

McCormick has been grappling with higher costs stemming from the coronavirus outbreak. Notably, pandemic-induced expenses put pressure on gross profit margin as well as adjusted operating margin to some extent during first-quarter fiscal 2021. In fact, management expects to incur pandemic-related costs of nearly $60 million during fiscal 2021 majorly due to third-party manufacturing expenses. We note that the metric came in at $50 million during 2020.

That said, effective cost-saving plans along with the aforementioned upsides are likely to help this Zacks Rank #3 (Hold) company stay afloat amid such hurdles. The company focuses on saving costs and enhancing productivity through its ongoing Comprehensive Continuous Improvement (CCI) program. The company achieved cost savings of $113 million in fiscal 2020, courtesy of the CCI program. Further, it expects to achieve CCI-led cost savings of nearly $110 million in fiscal 2021.

We note that McCormick’s shares have increased 15.2% in a year compared with the industry’s growth of 24.8%.

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