Please ensure Javascript is enabled for purposes of website accessibility

McCormick Issues a Bland Outlook for 2020

By Demitri Kalogeropoulos - Jan 28, 2020 at 11:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The spice giant sees another year of weak sales gains ahead.

Investors had modest expectations heading into McCormick's (MKC -0.70%) fourth-quarter earnings release. The spices and flavorings specialist isn't struggling with flat or declining sales like many of its peers in the consumer packaged-foods industry. However, revenue gains have been sluggish lately, leading many on Wall Street to question the company's ambitious target of roughly 5% organic growth over the long term.

On Tuesday, McCormick added to those worries by projecting a second straight year of underwhelming sales gains. The company also predicted spiking costs in 2020 that will keep a lid on profits.

Let's take a closer look.

A home chef adds spices to a rack of ribs.

Image source: Getty Images.

Meeting low expectations

Sales growth trends didn't break from the generally weak results investors saw through most of 2019. Organic revenue was up 2% in the fourth quarter, matching the prior quarter's uptick. That modest boost ensured that gains landed at 3% for the year, or right at the low end of management's forecast range.

With sales rising 2% over the past six months, it's clear that McCormick's growth rate has slowed in key areas like its core U.S. retailing segment. That deceleration appears more tied to competitive offerings from grocery stores, too, rather than timing issues on major retailer orders.

On the bright side, McCormick notched several impressive financial wins. Cost cuts landed at $463 million, or well ahead of the initial $400 million annual goal. That success combined with higher prices to push profitability up. Gross profit margin and operating margin each improved by roughly 1 percentage point. Cash flow results were even better, with operating cash jumping 15% to mark an eighth consecutive year of record cash generation. As a result, CEO Lawrence Kurzius and his team had plenty of resources to direct toward growth initiatives like marketing and toward supporting the dividend, which they increased by 10% during the year.

A new strategy

McCormick's 2020 outlook doesn't threaten those core financial advantages, but it does suggest an unusually difficult year for the business ahead. Executives see sales growth landing between 2% and 4%, which is again well below the company's long-term goal of 5% annual growth.

Management also plans to significantly ramp up spending this year in what they call a "business transformation investment." That spending surge will limit earnings so that adjusted profit is roughly flat or even slightly lower, year over year. McCormick's long-term aim is to expand that figure by about 10% each year. The cash needs of the business also imply that McCormick isn't likely to have excess resources to devote to resuming stock buybacks.

Investors will likely have to wait until the second half of the year to judge whether these strategic shifts have succeeded in returning the consumer staples business to an annual expansion pace that's closer to 5% than the 3% management is targeting today.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McCormick & Company, Incorporated Stock Quote
McCormick & Company, Incorporated
$82.67 (-0.70%) $0.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.