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McCormick Earnings Take a Hit From COVID-19

By Demitri Kalogeropoulos - Mar 31, 2020 at 4:11PM

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Joining its peers, the food giant withdrew its 2020 outlook on spiking volatility.

Investors have been more cautious about McCormick's (MKC -0.20%) business since the COVID-19 outbreak began affecting global commerce in February. While the spice and flavorings giant sells pantry items that are now in high demand, it counts restaurant chains, which are facing historically challenging selling conditions right now, as some of its biggest customers.

On Mar. 31, McCormick announced fiscal first-quarter results that reflected this volatile operating position. While sales for the period were only mildly pressured by coronavirus containment measures in China, the earnings pinch was great enough to suggest significant challenges ahead through at least the next quarter.

Let's dive right in.

A man adds spice to a piece of meat

Image source: Getty Images.

Steady growth outside of China

Currency-neutral sales fell 1% year over year to mark a decline from the 3% growth shareholders enjoyed in fiscal 2019. Consumer revenue fell in the U.S. region, ticked up slightly (excluding currency) in the EMEA (Europe, Middle East, and Africa) region, and dove 28% in China, where commerce was significantly disrupted during the month of February. 

McCormick executives said the results lined up with their expectations -- except for the unusual situation in China. Sales would have been up 2% excluding the impact of the coronavirus on that economy. "Lower operating results from this impact offset the otherwise solid sales, operating income, and earnings-per-share growth we delivered in the first quarter," CEO Lawrence Kurzius said in a press release.

Earnings declines

The Chinese demand slump had a more pronounced effect on the bottom line. Operating profit dipped 2% to $194 million, leading to a 4% drop in earnings per share. Again, executives put the blame squarely on economic disruptions in China, which reduced operating income by 10%.

Lower sales to restaurant chains in that market more than offset the gains McCormick posted from higher prices across its spice and flavorings portfolio. Its cost-cutting program, meanwhile, continued lifting gross profit margin. "We are confident our underlying foundation remains strong," Kurzius said.

Withdrawing the guidance

The short-term operating picture got cloudy enough to convince McCormick to withdraw its fiscal 2020 outlook. While the company is seeing a spike in demand as consumers stock up on pantry items, its restaurant services segment is shrinking, and it's impossible to predict the full impact today as social-distancing efforts freeze many major markets, including the U.S.

The good news is McCormick has plenty of financial flexibility to sustain itself through a significant short-term operating disruption. It has strong cash flow and access to additional liquidity if needed, management said.

McCormick is optimistic that it will have much more clarity to offer investors by the time its next earnings report rolls around in June. At that point, the consumer foods specialist believes it will resume offering a fiscal outlook for the year.

Before the coronavirus struck, McCormick had been predicting that earnings and sales growth would both be sluggish in 2020 before the company returned to a faster expansion pace in 2021. It's likely that today's poor economic conditions, even if they last just through the fiscal second quarter, will delay that expected rebound at least into the next fiscal year.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.

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