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McCormick's (MKC) Q2 Earnings Beat Estimates, Sales Up Y/Y

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McCormick & Company, Incorporated MKC posted second-quarter fiscal 2021 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Moreover, sales increased year over year owing to strength in the Flavor Solutions segment. Also, management raised its fiscal 2021 outlook.

Quarter in Detail

Adjusted earnings of 69 cents per share declined 7% from 74 cents reported in the year-ago quarter, mainly due to higher adjusted income tax rate. Nevertheless, the metric surpassed the Zacks Consensus Estimate of 64 cents per share.

This global leader of flavors and spices generated sales of $1,556.7 million, up 11% year over year. This includes favorable impact from currency translation of 3%. Moreover, sales from Cholula (acquired in November 2020) and FONA (acquired in December 2020) contributed 5% to the upside. We note that strength in the company’s Flavor Solutions segment drove growth. On a constant-currency (cc) basis, sales rallied 8%. Moreover, sales in the quarter surpassed the Zacks Consensus Estimate of $1,516.4 million.

McCormick & Company, Incorporated Price, Consensus and EPS Surprise

McCormick & Company, Incorporated Price, Consensus and EPS Surprise
McCormick & Company, Incorporated Price, Consensus and EPS Surprise

McCormick & Company, Incorporated price-consensus-eps-surprise-chart | McCormick & Company, Incorporated Quote

Gross profit margin contracted 190 basis points to 39.5% thanks to unfavorable product mix and increased cost inflation. These were somewhat countered by cost savings from Comprehensive Continuous Improvement (CCI) program.

Operating income was $237 million, down from $257 million reported in the year-ago quarter. The downside reflects $7-million transaction costs associated with the Cholula and FONA buyout. Also, some year-over-year increase in special charges added to concerns.

Segment Details

Consumer: Sales dropped 2% (down 5% in cc) to $945.2 million. This includes 2% growth from Cholula buyout. The downside can be attributed to extra ordinary increase in demand for the company’s products in the year-ago quarter, thanks to spike in pandemic-led cook-at-home trend.

Sales in the Americas declined 6% (down 7% at cc), caused by lapping of increased demand from prior-year quarter. Consumer sales in Europe, Middle East and Africa (EMEA) went up 4% (down 4% at cc). Further, consumer sales in the Asia/Pacific market increased 26% (up 15% at cc) on the back of favorable demand for products related to away-from-home consumption.

Flavor Solutions: Sales in the segment increased 39% (up 35% at cc) to $611.5 million from the prior-year quarter’s figure to $438.5 million. The upside was caused mainly by increased sales to the company’s restaurant and other foodservice customers. The company also highlighted that away-from-home dining was largely restricted in the year-ago quarter. Also, growth from packaged food and beverage companies were an upside. Moreover, contribution from acquisitions was a driver. Sales in the Americas increased 32%, while the metric surged 78% in the EMEA region. Sales in Asia-Pacific region rose 36% driven by higher growth from quick service restaurants along with pandemic-led lockdown recovery.

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Financial Update

McCormick exited the quarter with cash and cash equivalents of $291.8 million, long-term debt of $4,735.9 million and total shareholders’ equity of $4,340.8 million. For six months ended May 31, net cash provided by operating activities was $228.7 million.

Fiscal 2021 Outlook

Based on the solid year-to-date performance and operating momentum, management raised its sales, adjusted operating income and adjusted earnings per share (EPS) view for fiscal 2021. Additionally, the company anticipates a three-percentage point positive impact from currency rates on sales and two-percentage point favorable impact on adjusted operating income as well as adjusted EPS. Apart from this, management expects sustained shift in consumer demand to at-home consumption compared with the pre-pandemic levels. It also expects to see gradual recovery in demand from restaurant and other foodservice customers.

The company now expects to achieve sales growth of 11-13% (up 8-10% at cc) year over year. Earlier, management had expected to achieve sales increase of 8-10% (up 6-8% at cc). The view takes into account additional impact of the Cholula and FONA buyouts. Apart from this, the company’s sales growth projection includes the impact of pricing actions undertaken to somewhat offset cost increases. Moreover, the company expects to witness organic sales growth in both the segments, backed by new products, brand marketing, category management as well as differentiated customer engagement.

Further, adjusted operating income is now expected to increase in the band of 10-12% (up 8-10% at cc). Earlier, the metric was projected to grow in the band of 9-11% (up 7-9% at cc). Adjusted EPS are now expected in the range of $3.00-$3.05, reflecting a rise of 6-8%. Earlier, management had expected the metric in the range of $2.97-$3.02. Notably, the company had reported adjusted EPS of $2.83 in fiscal 2020. The outlook suggests solid growth in base business as well as contributions from acquisitions. This is likely to be somewhat offset by impact from incremental 2021 business transformation and pandemic-related costs among others. Also, higher projected adjusted effective tax rate is a concern.

Price Performance

This Zacks Rank #4 (Sell) stock has declined 7.6% so far this year against the industry’s growth of 6.1%.

3 Key food Picks

Darling Ingredients Inc. DAR, currently sporting a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 29.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Medifast, Inc. MED, currently sporting a Zacks Rank #1, has a trailing four-quarter earnings surprise of 12.7%, on average.

Nomad Foods Limited NOMD, currently carrying a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 10.3%, on average.

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