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McCormick's Momentum Continues

·7 mins read

- By Nathan Parsh

One of the beneficiaries of the Covid-19 pandemic and the resulting closure of dine-in restaurants has been packaged food companies. Consumers were forced to eat at home much more than usual, allowing packaged food companies the opportunity to gain and keep new customers.

One such name that is growing its customer base and keeping those customers in the fold is McCormick & Co. (NYSE:MKC).

The company simply rocked its second quarter and followed that up in the most recent quarter. While the restrictions on dine-in restaurants has eased in many parts of the world, McCormick managed to maintain its momentum in the third quarter. The results speak to the sustained staying power of the company's product offerings, which could send the stock higher.

Quarterly highlights

McCormick reported third-quarter results on Sept. 29.

McCormick's Momentum Continues
McCormick's Momentum Continues

Source: McCormick's Third-Quarter Earnings Presentation, slide 15.

Revenue increased 7.6% to $1.4 billion, topping Wall Street analysts' expectations by $38 million. Earnings per share increased 7 cents, or almost 5%, to $1.53. This was 1 cent better than the average analysts' estimate.

Revenue growth matched that of the second quarter. This was important because the second quarter saw more disruptions to restaurants than the third quarter. Despite more dining options available to customers, many still chose to cook at home with McCormick's products. This shows that the company was able to sustain its customer base even as more eating options became available. These repeat customers bode well for long-term success.

The earnings beat wasn't as impressive as the previous quarter, where results were 31 cents ahead of estimates. This is likely due to the market catching on to McCormick's success and raising the numbers accordingly.

McCormick's company-wide volumes improved 6.8%, down slightly from the second quarter's total of 7.4%. Pricing was a tailwind to results, while currency reduced net sales by 1%.

The consumer segment showed another stellar quarter of growth. Net sales were up almost 15%, volumes increased 13.6% and pricing added 1.5% to results. Currency was a slight headwind to results.

Sales for the Americas region were up more than 17%, which was down significantly from the prior quarter's 36% gain. Regardless, the high double-digit volume growth was still impressive. McCormick saw higher sales across nearly the entire breadth of its branded portfolio. The U.S. branded portfolio saw a 28% uptick in growth during the quarter. The company continued to outperform the center aisle of the grocery store, with sales growing 2.5 times that of the market. This helped McCormick to grow its market share in seven out of 11 product categories. Household penetration was up 8%, while repeat buyers grew 7%. This is a high level of growth for a company that has been in business for more than 130 years. The company raised prices prior to Covid-19 to help offset input costs, which benefited results in the Americas.

Sales growth of 23% for the Europe, Middle East and Africa region was actually a 100-basis points acceleration from the second quarter. This region had higher demand in branded spices and seasonings, while homemade desserts and dry recipes also saw an improvement in sales. An increase in advertising helped drive double-digit household penetration and repeat customer growth.

The Asia Pacific region recorded a net sales decrease of 8.7% due to a 6.3% decline in volumes and currency translation. While results were down for the third quarter, this was a much better performance than the second quarter, when net sales declined almost 18%. Frank's Red Hot and branded spices and seasonings captured market share in Australia, while demand for condiments was evident in China.

Flavor Solutions was a real drag on results in the second quarter as this segment suffered a 18.5% decrease in sales. The segment was much less determinantal to overall results this time around, however. Net sales were down 2.9% year over year. Pricing was higher by 2.1%, but wasn't enough to offset a 3.3% decline in volume and currency exchange.

The Americas region was much less of an anchor for this segment as sales were down just 4.7%. Pricing and better sales with packaged food companies minimized the damage by weak branded foodservice and quick-service restaurants.

EMEA sales, which fell a staggering 34% in the second quarter, were down just 1% in the third quarter. Price increases nearly made up for lower volumes and currency exchange. As with the Americas region, branded foodservice and quick service restaurants were very weak, but sales with packaged food companies helped soften the blow. This region is not yet back to 2019 levels.

After falling double-digits in the previous quarter, sales in the Asia Pacific region returned to almost 5% growth. McCormick benefited from the reopening of quick service restaurants in China and Australia. Restrictions do remain in place in certain areas.

The higher sales led to gross margins expanding 70 basis points to 41.3%. Higher costs related to Covid-19 drove a 130-basis point increase in selling, general and administrative expenses as a percent of net sales.

McCormick's balance sheet remains solid. The company closed the quarter with $221 million in cash and cash equivalents among $1.76 billion in current assets. Current liabilities stand at almost $2 billion, with $432 million in debt due within a year. Long-term debt is $3.7 billion

The Consumer segment had another strong quarter. The Americas and EMEA were up considerably compared to the third quarter of 2019. Compared to the second quarter of 2020, the Americas region wasn't quite as good as the prior quarter, while EMEA improved slightly and Asia Pacific was significantly better.

Flavor Solutions was slightly weaker on a year-over-year basis, but remarkably stronger than the second quarter of this year. Food service and quick-service restaurants remain challenged in many regions.

The company announced a 2-for-1 stock split for shareholders of record on Nov. 20. The stock split will be distributed Nov. 30.

McCormick resumed its guidance for the year. Prior to the pandemic, McCormick had expected revenue growth of 2% to 4% and earnings per share in a range of $5.20 to $5.30. Due to recent results, the company has guided towards 4% to 5% revenue growth, with expectations that results will be near the high end of its forecast. Earnings per share are now expected to range from $5.64 to $5.72. The midpoint would represent a 6.2% increase from 2019.

Final thoughts

McCormick continues to benefit from the eat-at-home trend caused by the Covid-19 pandemic even as restrictions on restaurants eased in areas of the world during the third quarter. The key takeaway from this quarter is that the consumer segment remains strong and Flavor Solutions isn't quite as weak as it was previously. In fact, it is likely that Flavor Solutions has already hit its low point. This means that the segment likely won't be much of a hindrance going forward and could even return to growth as consumers eat out more.

Shares of the company are expensive at 34.5 times 2020 earnings per share estimates, but McCormick is one of the rare packaged food companies showing more than minimal growth. The company appears to have left the worst parts of the pandemic behind it. Even as dining out becomes more of an option, McCormick's household penetration and repeat customer rates likely mean the stock isn't done going higher.

Disclosure: The author has a long position in McCormick & Co.

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This article first appeared on GuruFocus.