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McCormick's (MKC) Q3 Earnings Beat Estimates, Sales Up Y/Y

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McCormick & Company, Incorporated MKC posted third-quarter fiscal 2021 results, with the top and the bottom line increasing year over year. The company’s earnings surpassed the Zacks Consensus Estimate, while sales missed the same.

Sales increased year over year owing to strength in the Flavor Solutions and Consumer segments. Also, management updates fiscal 2021 sales view upward, while lowering its earnings outlook.

Quarter in Detail

Adjusted earnings of 80 cents per share rose 5% from 76 cents reported in the year-ago quarter on the back of higher sales and lower adjusted income tax rate. These were somewhat offset by elevated cost inflation. The metric surpassed the Zacks Consensus Estimate of 73 cents per share.

This global leader of flavors and spices generated sales of $1,549.4 million, up 8% year over year. This includes a favorable impact from currency translation of 3%. Sales from Cholula (acquired in November 2020) and FONA (acquired in December 2020) contributed 4% to the upside. Strength in the company’s Flavor Solutions and Consumer segments drove growth. On a constant-currency (cc) basis, sales were up 5%. However, the metric lagged the Zacks Consensus Estimate of $1,556.4 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 260 basis points to 38.7% thanks to unfavorable product mix and increased cost inflation. These were somewhat countered by cost savings from the Comprehensive Continuous Improvement (CCI) program.

Operating income was $265 million, down from $273 million reported in the year-ago quarter. The downside reflects $1-million transaction and integration costs associated with the Cholula and FONA buyout. Also, special charges to the tune of $6 million added to the headwinds.

Segment Details

Consumer: Sales inched up 1% (down 1% in cc) to $921.9 million. This includes 3% growth from the Cholula buyout. In spite of the tough year-over-year comparison, sales in the segment reflect a sustained shift to higher at-home cooking trends, driven by solid brand marketing, online engagement, new innovations and buyout efforts.

Sales in the Americas remained flat year over year. The metric was down 1% at cc, caused by lapping of increased demand from the prior-year quarter’s level, even as the demand remains above pre-pandemic levels. Consumer sales in Europe, Middle East and Africa (EMEA) went down 6% (down 11% at cc). Consumer sales in the Asia/Pacific market increased 20% (up 11% at cc) on the back of favorable demand for products related to away-from-home consumption.

Flavor Solutions: Sales in the segment increased 21% (up 17% at cc) to $627.5 million. The upside was caused mainly by increased sales to the company’s packaged food and beverage customers as well as restaurant and other foodservice customers. The company also highlighted that the FONA and Cholula buyouts contributed to growth.

Sales in the Americas increased 21%, while the metric surged 28% in the EMEA region. Sales in the Asia-Pacific region rose 8%, driven by higher growth from quick service restaurants.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $312.6 million, long-term debt of $3,985 million and total shareholders’ equity of $4,403.1 million. For nine months ended Aug 31, net cash provided by operating activities was $372.9 million.

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Fiscal 2021 Outlook

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 updates fiscal 2021 sales view upward, while lowering its adjusted operating income as well as adjusted earnings per share (EPS) view. 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.

The company now expects to achieve sales growth of 12-13% (up 9-10% at cc) year over year. Earlier, management had expected to achieve sales increase of 11-13% (up 8-10% at cc). The view takes into account the additional impact of the Cholula and FONA buyouts. The company’s sales growth expectation includes the impact of pricing actions undertaken to somewhat offset the projected mid-single digit increase in costs.The company expects to witness organic sales growth in both the segments through 2021, 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 6-8% (up 4-6% at cc). Earlier, the metric was projected to grow in the band of 10-12% (up 8-10% at cc). The lowered guidance reflects escalated rate of inflation as well as industry-wide logistics challenges.

Adjusted EPS are now expected in the range of $2.97-$3.02, reflecting a rise of 5-7%. Earlier, management had expected the metric in the range of $3.00-$3.05. Notably, the company had reported adjusted EPS of $2.83 in fiscal 2020. The lowered adjusted EPS outlook takes into account the updated adjusted operating income view. The earnings outlook suggests solid growth in base business as well as contributions from the acquisitions. This is likely to be somewhat offset by impact from incremental 2021 business transformation and pandemic-related costs. Also, higher projected adjusted effective tax rate is a concern.

The Zacks Rank #3 (Hold) stock has declined 4.8% in the past three months compared with the industry’s fall of 4.7%.

3 Key food Picks

Darling Ingredients Inc. DAR, currently sporting a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 39.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Medifast, Inc. MED, currently carrying a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 16%, on average.

Sysco Corporation SYY, currently carrying a Zacks Rank #2, has a trailing four-quarter earnings surprise of 13.3%, on average.


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