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Pandemic-Led Demand Aids McCormick (MKC), High Costs Persist

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McCormick & Company, Incorporated MKC is benefiting from rising demand stemming from consumers’ elevated at-home consumption. In spite of leniency in pandemic-induced restrictions, at-home consumption in general remains above pre-pandemic levels. Impressive recovery from away-from-home customers is also yielding. The company’s focus on capacity expansion and innovation has been aiding growth. Apart from this, management is focusing on saving initiatives to tackle escalated costs.

Pandemic-Led Demand Fuels Growth

McCormick is witnessing higher demand for its products amid sustained at-home consumption trend as well as recovery in away-from-home consumption. This was reflected in second-quarter fiscal 2021, with sales increasing 11% year over year and surpassing the Zacks Consensus Estimate. Management, in its last earnings call, highlighted that it expects at-home consumption to remain higher than pre-pandemic levels. It also anticipates gradual recovery in demand from restaurant and other foodservice customers.

Based on solid year-to-date performance and operating momentum, management had raised its sales and adjusted earnings per share (EPS) view for fiscal 2021. The company now expects to achieve sales growth of 11-13% year over year. Earlier, management had expected to achieve growth of 8-10%. The view takes into account additional impact of the Cholula and FONA buyouts. The company’s sales growth projection includes the impact of pricing actions undertaken to offset cost increases. Management expects to witness organic sales growth in the segments, backed by new products, brand marketing, category management as well as differentiated customer engagement.

Adjusted EPS are now expected in the range of $3.00-$3.05, which suggests a rise of 6-8%. Earlier, management had expected the metric in the range of $2.97-$3.02. McCormick had reported adjusted EPS of $2.83 in fiscal 2020. The outlook suggests solid growth in base business as well as contributions from acquisitions.

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What Else is Driving Growth?

McCormick has strategically increased its presence through acquisitions to expand portfolio. In December 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 November 2020, McCormick completed the acquisition of the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand. McCormick believed that the buyout of Cholula will boost growth potential across the condiment platform and broaden the hot sauce category. Management, in its call, highlighted that in fiscal 2021, it expects sales contributions from both the aforementioned buyouts at the high end of 3.5-4% range.

The company is on track to make investments and expand its infrastructure worldwide. McCormick is investing in its supply chain to enhance capacity and capabilities. Management, in its last earnings call, highlighted that it is increasing the condiment and seasoning capacity. Notably, it is on track to optimize its distribution network for the new Northeast U.S. distribution center. The company is on track to complete its U.K. Flavor Solutions manufacturing facility.

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, it enjoys strong retail acceptance for new products and is gaining from momentum arising from recent product launches.

What’s Hurting McCormick?

McCormick has been grappling with higher costs stemming from the coronavirus outbreak. Management expects to incur pandemic-related costs of nearly $60 million during fiscal 2021. Management, in fiscal second-quarter earnings call, highlighted that it is witnessing broad-based inflation across several commodities, packaging materials and transportation costs.

During the quarter, the company’s gross profit margin contracted 190 basis points (bps) to 39.5% thanks to unfavorable product mix and increased cost inflation. Further, McCormick’s adjusted operating margins contacted 200 bps thanks to sales shift between the company’s segments.

Nevertheless, we believe that effective cost savings coupled with 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 ongoing Comprehensive Continuous Improvement (“CCI”) program. McCormick achieved cost savings of $113 million in fiscal 2020, courtesy of the CCI program. Management is on track to achieve CCI-led cost savings of nearly $110 million in fiscal 2021.

McCormick’s shares have inched up 0.9% in the past six months compared with the industry’s growth of 4%.

3 Key Food Bets

Pilgrim’s Pride Corporation PPC, currently carrying a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 34%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hormel Foods Corporation HRL, currently carrying a Zacks Rank #2, has a trailing four-quarter earnings surprise of 3.1%, on average.

Sanderson Farms, Inc. SAFM, currently carrying a Zacks Rank #2, has a long-term earnings growth rate of 36%.

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