Amid a weakening selling environment for consumer packaged foods, McCormick (MKC 2.19%) made a bold move last year that amounted to betting on acquisitions to position itself for faster growth. In good news for its shareholders, the latest earnings report contained promising signs that this $4 billion buyout was worth the price. The addition of brands like French's helped the spice and flavorings giant achieve double-digit sales gains and better profitability.
Below are a few highlights from that promising first-quarter report.
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15%: Sales growth
Sales rose 15% after accounting for foreign currency shifts. That pace represented a slowdown from the prior quarter's 20% spike but was still comfortably above management's target for the year.
Most of the growth came from the recent Reckitt Benckiser portfolio acquisition, and management said these franchises are so far performing according to plan. Traditional flavoring demand was more modest, but still positive across each of McCormick's sales geographies and product niches.
42%: Gross profit margin
Gross profit margin improved by 2.4 percentage points to hit 42% of sales. Several positive trends contributed to this win, including a shift toward higher-value brands (like Frank's hot sauce and French's mustard), lower costs, and increased prices.
MKC Gross Profit Margin (TTM) data by YCharts.
These improvements gave McCormick room to spend more on marketing while still lifting its operating profit margin.
$4.38 billion: Long-term debt
The Reckitt Benckiser acquisition cost the company over $4 billion and has led to significantly higher debt and interest payment burdens. Long-term debt is up to $4.38 billion from $804 million a year ago, but management is determined to steadily chip away at that total.
Meanwhile, interest expenses are elevated, but manageable. These payments jumped to $42 million from $14 million yet still allowed income before taxes to rise 19% to $143 million.
$2.24 per share: Tax law benefit
McCormick booked a one-time benefit from recent tax law changes that, at $2.24 per share, pushed earnings up to $3.18 from $0.74 a year ago. The company announced plans to direct a portion of that windfall toward higher wages for its employees and a one-time bonus payment for most of its U.S.-based workforce.
The remaining cash will be used to invest in growth initiatives like new product introductions, increased direct returns to shareholders through dividends and stock buybacks, and debt repayment. Income investors saw the most immediate payoff from this plan, since McCormick raised its dividend by 11% to an annual rate of $2.08 per share.
14%: Full-year growth forecast
McCormick raised its aggressive fiscal 2018 forecast that had predicted growth of between 12% and 14% for the year. With a solid start to the year behind it, the spice giant now believes sales will rise by between 13% and 15%. As for profits, investors can expect earnings to rise by 15% at the midpoint of guidance to $4.85-$4.95 per share.
Acquisitions play a key role in this brightening outlook, but McCormick also expects help to come from expanded distribution, increased marketing spending, and higher selling prices. These favorable trends should combine to allow sales to grow at almost three times the company's long-term annual target of between 4% and 5%.
