Third-quarter adjusted earnings per share at McCormick (MKC -0.38%), the leading global spices and condiments maker, came in at a tasty $1.46 -- 14% higher than the same quarter a year ago. Growth picked up on the consumer side of the business, which helped overall sales rise 2.2% on a constant currency basis. As well as a favorable product mix and ongoing cost cuts, this meant a recipe for success for the dividend aristocrat.
Investors were hungry for shares following the Oct. 1 report, bidding them up 6.9% in above-average trading volume.
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A pleasant quarter in Flavortown
McCormick was able to build on the momentum of its strong first-half performance. Strength in the consumer division drove third-quarter sales growth of 4%, which more than offset a decline of 0.4% in "flavor solutions," which caters to restaurants and food-service companies. Well-received new product launches provided a boost on the consumer side, while management attributed the slowdown in industrial sales to the timing of promotions and new product introductions.
The company continues to benefit from its Comprehensive Continuous Improvement (CCI) program, which is on target to generate $110 million in cost savings this year after cutting $118 million in 2018. Selling, general, and administrative expenses (SG&A) decreased by 0.6% in the third quarter, thanks in part to CCI-led frugality that helped the company's operating margin expand by 170 basis points to 19.1%.
China, e-commerce stir growth
The geographical breakdown of third-quarter results showed broad-based strength in the Americas and surging sales in the Asia-Pacific region. These combined to offset weakness in Europe, where extreme summer temperatures hurt sales. The Asia-Pacific region witnessed nearly 15% sales growth in the third quarter thanks to consumers hungry for the company's herbs, spices, chicken bouillon, and "world flavor" sauces (as well as higher pricing).
McCormick recently expanded its partnership with Tmall.com, China's largest business-to-consumer retail site. This deal is supporting not only Asia-Pacific sales but online sales growth. The launch of the online McCormick Shop in the U.S. is also helping the company reap the benefits of its digital marketing efforts, as global e-commerce sales surged by 43% in the first half of the year. In September, McCormick received recognition for its ability to adapt to changing consumer food habits by expanding its product and recipe content: It was named the top food brand in digital marketing by marketing research company Gartner L2.
Simmering guidance revision
The company raised its earnings forecast for the second straight quarter, reaffirming its bullish outlook for the second half of the year. Last quarter, management stated that they were anticipating strong sales performance in the back half of the year. The third-quarter results show that these high expectations are on the way to being fulfilled even before the key holiday season, when consumers gobble up spices and seasoning mixes in high volume. Although management narrowed their sales-growth outlook, to 1%-2% from 1%-3%, they also raised their 2019 adjusted earnings-per-share estimate. That boost, to $5.30-$5.35 from $5.20-$5.30, represents 7% to 8% growth.
What's cooking in Q4?
As the stock takes aim at surpassing its Aug. 19 all-time high of $171.10, McCormick management once again demonstrated an ability to execute in the third quarter. The stock trades at 27 times forward earnings, but the premium multiple appears warranted given McCormick's earnings stability, expanding margins, strong balance sheet, and robust cash flow. The recent strength is likely to carry over to the next period as the company is well positioned to serve up a flavorful fourth-quarter report.
