McCormick (MKC) Raises Profit Guidance on Q2 Earnings Beat
McCormick & Company, Incorporated MKC reported strong second-quarter fiscal 2023 results, wherein earnings and sales increased year over year and the former beat the Zacks Consensus Estimate.
Results reflect continued strength in demand for the company’s compelling products, along with the efficient implementation of growth strategies. McCormick remains encouraged about growth due to sustained demand and a focus on optimizing the cost structure. Management raised its adjusted operating income and bottom-line guidance for fiscal 2023 while keeping the sales view unchanged.
Quarter in Detail
Adjusted earnings of 60 cents per share increased 25% from 48 cents in the year-ago quarter. The metric surpassed the Zacks Consensus Estimate of 57 cents per share. The year-over-year increase was a result of elevated adjusted operating income, partly negated by increased interest costs and a higher adjusted effective tax rate.
McCormick & Company, Incorporated Price, Consensus and EPS Surprise
McCormick & Company, Incorporated price-consensus-eps-surprise-chart | McCormick & Company, Incorporated Quote
This global leader in flavor generated sales of $1,659.2 million, up 8% year over year. Constant-currency (cc) sales increased 10% on 11% growth from pricing actions, somewhat offset by a 1% decline in volumes. However, the top line missed the Zacks Consensus Estimate of $1,673 million.
The volume decline stemmed from the Kitchen Basics divestiture, the exit of the Consumer business in Russia and a 1% decline from MKC’s decision to discontinue the low-margin business.
McCormick’s gross profit margin expanded 310 basis points due to efficient pricing, an improved product mix and cost savings from the Comprehensive Continuous Improvement and Global Operating Effectiveness (“GOE”) programs. This was partly countered by escalated cost inflation.
SG&A expenses escalated year over year due to elevated employee incentive compensation expenses and increased distribution costs, partly offset by cost savings from the abovementioned programs.
The adjusted operating income was $235 million, which jumped 35% year over year. At cc, the adjusted operating income rose 36%, backed by increased sales and gross margin, partly countered by a rise in SG&A expenses.
Segment Details
Consumer: Sales went up 5% to $912.1 million, while cc sales increased 7% due to a 9% rise in pricing, somewhat offset by a 2% drop in volumes. The volume decline resulted from the same factors that hurt the overall company volumes. Sales increased 3% in the Americas, 7% in the EMEA and 19% in the Asia/Pacific.
Flavor Solutions: Sales in the segment advanced 12% to $747.1 million. On a cc basis, sales grew 13% due to solid pricing actions, partly negated by soft volumes. Flavor Solutions’ sales in the Americas grew 12%. Flavor Solutions’ sales in the EMEA rose by 9%. Sales in the Asia/Pacific market ascended 14% year over year.
Financial Update
McCormick exited the quarter with cash and cash equivalents of $127.4 million, long-term debt of $4,117.6 million and total shareholders’ equity of $4,956.9 million. Through the second quarter of fiscal 2023, net cash provided by operating activities amounted to $394 million.
Management expects to generate a robust cash flow in fiscal 2023, wherein it is likely to return a considerable part of its cash flow to shareholders via dividends.
Fiscal 2023 Guidance
McCormick anticipates fiscal 2023 to witness a solid underlying business performance, backed by sales growth. It expects the GOE Program and the lapping of pandemic-led hurdles to have a positive effect on the fiscal 2023 operating income, which is likely to be somewhat negated by the impacts of the Kitchen Basics divestiture and a rise in employee incentive compensation costs.
Management anticipates currency movements to have a minimal impact on fiscal 2023 net sales, operating income and earnings per share (EPS).
For fiscal 2023, net sales are expected to increase 5-7% from the fiscal 2022 levels. Management expects sales growth to be fueled by pricing actions, which, along with cost savings, are likely to help it counter inflationary headwinds. The company anticipates seeing solid growth via brand strength, brand marketing, new products, category management and differentiated customer engagement.
The adjusted operating income is likely to grow 10-12% now, up from the prior guidance of 9-11% growth. Management envisions fiscal adjusted EPS in the band of $2.60-$2.65 compared with the earlier view of $2.56-$2.61. The bottom-line view suggests growth from $2.53 recorded in fiscal 2022.
The bottom-line growth is likely to be fueled by a solid operating performance, partly offset by increased interest expenses and a higher projected adjusted effective tax rate.
This Zacks Rank #2 (Buy) stock has rallied 13.4% in the past three months compared with the industry’s growth of 1.9%.
Other Solid Staple Stocks
Some other top-ranked consumer staple stocks are Nomad Foods NOMD, The Chef’s Warehouse CHEF and Lamb Weston LW.
Nomad Foods, a frozen food product company, currently sports a Zacks Rank #1 (Strong Buy). NOMD has a trailing four-quarter earnings surprise of 8.5%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Nomad Foods’ current fiscal-year sales suggests growth of around 8% from the year-ago reported figures.
The Chef’s Warehouse, which engages in the distribution of specialty food products, currently sports a Zacks Rank #1. CHEF has a trailing four-quarter earnings surprise of 33.8%, on average.
The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal-year sales and earnings suggests growth of 25.5% and 7.1%, respectively, from the year-ago reported numbers.
Lamb Weston, which is a frozen potato product company, currently carries a Zacks Rank #2. LW has a trailing four-quarter earnings surprise of 47.6%, on average.
The Zacks Consensus Estimate for Lamb Weston’s current fiscal-year sales and earnings suggests growth of 30% and 117.3%, respectively, from the year-ago reported numbers.
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