Investors in McCormick (MKC -0.81%) had some big questions heading into its fiscal second-quarter earnings report. The spice and flavoring giant's last two announcements reflected a wide range of potential growth paths but generally suggested modest market-share gains in the context of improving profitability. Yet that positive outlook relied on demand holding up well for its core consumer food products and for its new launches through the year.
Last Thursday, McCormick revealed steady growth that, despite a slow start to the spring grilling season, kept the company on track to meet its wider 2019 objectives. Let's dive right in.
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Modest growth
Sales gains landed at 3% after adjusting for the currency exchange shifts that pushed reported revenue growth down to zero. That result marked a slight deceleration from the previous quarter's 4% boost and was at the low end of the 3% to 5% range that management has issued for the full year.
Still, CEO Lawrence Kurzius and his team said the results met their expectations and included a healthy mix of volume and pricing growth. In an investor presentation, executives said sales volumes rose 2.1% while prices inched higher by 0.7%. That result was held back by a weak U.S. consumer segment, though, with volume rising 2.2% as prices held flat. Management blamed a delayed start to the grilling season for those soft U.S. growth numbers. Other weak points included falling prices in its European division due to trade disruptions.
Income shifts
The profitability picture was mixed, but generally positive. Gross profit margin inched higher thanks to rising prices and the lift from McCormick's cost-cutting program. However, unfavorable currency exchange moves resulted in muted bottom-line gains as adjusted operating income rose by 5% to only modestly outpace the 3% increase in sales.
With help from its efficiency initiatives, and the shift in sales toward high-margin condiment and sauce brands, the company continued getting more profitable. Adjusted operating margin improved to 16.5% of sales from 15.7% a year ago. Lower tax expenses helped adjusted earnings per share jump 14% to $1.16.
Changing outlook
With more than half of the fiscal year behind it, McCormick now has a better idea how 2019 might unfold. To that end, Kurzius and his team updated both their sales and profit outlooks. The company still predicts that revenue will expand by 3% to 5% for the year, which implies stability or a modest acceleration over the next six months. Profit gains won't be quite as robust, with operating income now expected to rise by 8% to 10%, compared with the prior range of 10% to 12%.
Those two predictions mean that McCormick will lag both of its long-term growth targets in 2019. Yet profit margins are rising, cash flow is improving, and pricing trends are holding up well. Those wins, plus the branding and marketing investments the company is making today, should set McCormick up for faster growth next year. That helps explain why management is characterizing 2019's performance as shaping up to be a successful step in its growth strategy, which targets consistent market-beating sales gains and rising margins.
