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McCormick (MKC) Poised on Prudent Buyouts & Cost Savings

McCormick & Company MKC is capitalizing on a sustained shift to cooking more at home, higher digital engagement, clean and flavorful eating and trusted brands. The strategic buyouts and effective cost-saving plans of this global leader in flavors are yielding. These upsides aided McCormick’s third-quarter fiscal 2022 results, with the top line surpassing the Zacks Consensus Estimate and increasing year over year.

That being said, McCormick is not immune to rising inflationary pressure and supply-chain disruptions.

Let’s discuss this in detail.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Sales Growth & Bright View

During third-quarter fiscal 2022, McCormick generated sales of $1,595.6 million, up 3%. Constant currency (cc) sales increased 6%, on 10% growth from pricing actions. During the third quarter, cc sales increased at a three-year compounded annual growth rate (CAGR) of 7%, relative to a pre-pandemic baseline of 2019. The upside reflects sustained momentum in the business. Sales increased across Consumer and Flavor Solutions segments.

The company’s fiscal third-quarter sales performance reflects the strength of its broad global portfolio and the effective execution of its strategies despite a volatile operating environment. Its brand marketing investments, innovation and category management initiatives continue to drive growth.

For fiscal 2022, net sales are expected to increase 2% from fiscal 2021 levels and grow 3-5% at cc. Management expects sales growth to be fueled by pricing actions and cost savings. These factors are likely to offset inflationary pressures over time.

What Else is Driving McCormick’s Growth?

The Zacks Rank #3 (Hold) company increased its presence through acquisitions to enhance its portfolio. The company bought a 100% stake in FONA International, LLC and some of its affiliates. FONA’s diverse portfolio helps McCormick bolster its value-add offerings and expand the flavor solutions segment into attractive categories. In November 2020, McCormick completed the acquisition of the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand. McCormick believes that the buyout of Cholula accelerates its growth potential across the condiment platform and widens the product portfolio in the hot sauce category.

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, McCormick enjoys strong retail acceptance for its new products. Additionally, the company is on track to augment robust marketing support for its products. New product launches are an important part of the company’s growth. Management is leveraging its broad technology platform to develop clean label, organic and better-for-you solutions amid rising consumer’s health consciousness.

Hurdles on the Way

McCormick has been grappling with cost inflation for a while now. During third-quarter fiscal 2022, the company’s gross profit margin contracted 320 basis points (bps) to 35.5%, thanks to escalated cost inflation and other supply chain expenses. For 2022, management expects the adjusted gross profit margin to be down 350 to 300 bps year over year, mainly due to the Flavor Solutions segment. Adjusted operating income is likely to decline 13-11% (down 11-9% at cc) during the year.

During the third quarter of fiscal 2022, McCormick continued to witness supply-chain-related issues. In its last earnings call, management highlighted that recovery of some constrained materials is taking longer than anticipated. The company continues to incur escalated expenses to meet increased demand across the Flavor Solutions segment. In addition, it is witnessing lower-than-optimal operating leverage in the Consumer unit.

McCormick’s cost savings and the aforementioned upsides are likely to keep aiding growth. McCormick is focused on saving costs and enhancing productivity through the ongoing Comprehensive Continuous Improvement (CCI) program. Started in 2009, McCormick’s CCI program helped the company reduce costs and enhance productivity. It has used CCI savings to increase investments, leading to higher sales and profits. Management expects to achieve CCI-led cost savings of nearly $85 million in 2022.
MKC’s stock has increased 0.8% in the past year compared with the industry’s 7.6% growth.

Looking for Other Food Stocks? Check These

Some better-ranked stocks are Lamb Weston LW, General Mills GIS and Conagra Brands CAG.

Lamb Weston, a frozen potato product company, currently sports a Zacks Rank #1 (Strong Buy). LW has a trailing four-quarter earnings surprise of 47.3%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Lamb Weston’s current financial-year sales and earnings suggests growth of 14.6% and 45.7%, respectively, from the year-ago reported numbers.

General Mills, which manufactures and markets branded consumer foods, carries a Zacks Rank #2 (Buy) at present. General Mills has a trailing four-quarter earnings surprise of 6.1%, on average.

The Zacks Consensus Estimate for GIS’ current financial-year sales and earnings suggests growth of 2.7% and 3.8%, respectively, from the year-ago reported numbers.

Conagra Brands, operating as a consumer-packaged goods food company, currently carries a Zacks Rank of 2. CAG has a trailing four-quarter earnings surprise of 1.8%, on average.

The Zacks Consensus Estimate for Conagra Brands’ current financial-year sales and earnings suggests growth of 5.2% and around 3%, respectively, from the corresponding year-ago reported figures.

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Conagra Brands (CAG) : Free Stock Analysis Report

McCormick & Company, Incorporated (MKC) : Free Stock Analysis Report

Lamb Weston (LW) : Free Stock Analysis Report

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