McCormick Earnings Preview: The Trends to Watch

This could be a big week for McCormick (NYSE:MKC) investors. The spice and flavorings specialist will post its fiscal third-quarter results before the market opens on Tuesday, Sept. 29, and expectations are running high for that report.

While growth likely slowed in the months following McCormick’s COVID-19 related demand spike, shareholders are expecting to see strength from the company’s diverse food business, with impressive cash flow as an added benefit.

Let’s look at a few of the key trends to watch in Tuesday’s announcement.

Sales to restaurants and consumers

McCormick is expected to post a growth slowdown compared to the fiscal second-quarter’s pandemic-powered spike. Year-over-year sales gains should land at around 5%, or roughly half of the consumer staples giant’s most recent boost.

A young woman cooks at home.

Image source: Getty Images.

Watch for the retailer to reveal more balance between its consumer segment, which caters to at-home cooks, and the flavor division that counts restaurants and food service providers as its biggest customers.

There was a huge gap in demand between those units last quarter thanks to the surging popularity for pantry items during restaurant closures in April and May. This week’s results will show steadier growth across both segments so that overall gains remain above the 2% the company had been seeing before the pandemic struck. Looking further out, executives are expecting their consumer business to quickly return to normal demand levels while the food service segment takes longer to recover.

Tasty finances

The demand picture might be cloudy, but there’s less uncertainty around McCormick’s sparkling finances. Cash flow and profitability trends were both strong before the pandemic hit, and those metrics only improved in recent months. Operating income jumped more than 20% last quarter thanks to the combination of strong demand and rising gross and operating profit margins. Look for more gains in these areas on Tuesday, which should all support robust cash flow.

That improving cash profile is good news for a few reasons, including extra flexibility through what could be a tough global recession. The resources also give CEO Lawrence Kurzius and his team room to consider more game-changing brand acquisitions like the 2017 purchase of the French’s and Frank’s franchises. Cash on hand also means this Dividend Aristocrat can easily boost its payout and spend more on stock buybacks.

Looking ahead

Management isn’t likely to issue a detailed growth outlook given the volatility in the industry today and major questions around global economic trends. But it will be interesting to see whether McCormick sees any sustainable demand lift through the second half of 2020 and heading into its new fiscal year. In late June, executives said that favorable at-home eating trends have been accelerated by the COVID-19 crisis, suggesting just such a bounce.

Yet it might be another few quarters before investors know whether McCormick can reasonably target faster organic growth than its current long-term target range of between 3% and 5%. It seems likely that the pandemic will push results above that goal in 2020, but there’s still lots of uncertainty about where gains might settle next year and beyond.

Leave a Reply

Your email address will not be published. Required fields are marked *