As an investor, your judgment of McCormick's (MKC 5.94%) operating outlook will depend on which of its last two earnings reports you think better represents its growth prospects. Sales gains hit a wall at the end of fiscal 2018, but they rebounded in the following quarter to apparently put the spice giant back on track to meet its 2019 objectives.
That wide range of recent results raises the stakes for McCormick's upcoming earnings report, set for Thursday morning, and what it might say about the short- and long-term outlooks for the consumer packaged-food specialist.
Image source: Getty Images.
Getting back to normal
McCormick's flavorings and spices niche has routinely outperformed the broader packaged-foods industry. That tailwind, plus the fact that McCormick dominates the segment, has convinced management to target market-thumping long-term gains, with sales rising by around 5% annually.
Executives have cautioned that fiscal 2019 will mark a slight departure from that trend, but there's plenty of uncertainty around where growth with actually land. Sales gains slowed to 2% in the fiscal fourth quarter, and the acceleration to 4% in the most recent quarter suggests management was right to call the prior slowdown just a temporary speed bump. Another robust boost in organic revenue this week would add weight to that bullish reading of McCormick's business.
Looking beyond just the top-line sales results, investors will want to see evidence that the company is squeezing value from its French's and Frank's brand acquisitions and its innovative flavorings launches in the core franchise portfolio. This would be reflected in a healthy balance between rising sales volumes and higher average prices across McCormick's geographic sales markets.
Holding the line on costs
Food cost inflation is pressuring profits for the entire industry, but McCormick's new high-margin condiment sales are helping neutralize that challenge. In fact, adjusted operating margin rose by over 1 percentage point to 16% of sales.
The company should continue getting a boost from the shift in its sales base toward those hot sauce and mustard condiments this quarter. Rising prices should help, too. Finally, CEO Lawrence Kurzius and his team have been busy cutting costs and working to make the business more efficient. Overall, investors will be looking for these initiatives to combine to lift both gross and operating margins in the fiscal second quarter.
The long-term outlook
The close of the second quarter is an ideal time to update the full-year outlook, and so shareholders might see slight tweaks to McCormick's expectations for 4% sales growth and 10% profit gains in fiscal 2019. The more important comments will be around management's longer-term outlook, though. McCormick is hoping to return to its roughly 5% sales growth pace beginning next year. Investors are also looking forward to a return to stock purchase spending and perhaps more brand acquisitions, as debt levels come down following the $4 billion French's and Frank's purchase in 2017.
McCormick won't issue any official 2020 predictions on Thursday, but management's comments about the health of the industry will indicate whether they still see sales gains rebounding soon. Meanwhile, financial metrics like operating margin and cash flow will determine whether investors can expect a quick bump in direct shareholder returns (or perhaps more expensive brand acquisitions) as early as next year.
