McCormick's (NYSE:MKC) latest earnings report contained plenty of good news for investors. The spice and flavorings giant said that its supply chain is intact, and the company stands ready to meet a sustained demand boost for at-home cooking supplies across its global sales footprint.
On the other hand, COVID-19 containment measures in China clearly hurt the business in the fiscal first quarter and will continue pressuring revenue and profits through the full year. In a conference call with investors, CEO Lawrence Kurzius and his team explained why their experience in China wouldn't help in projecting sales trends for other affected countries. Management is still anticipating a volatile period ahead.
Let's take a closer look at management's comments.
Struggles in China
The disruption in China resulted in a 3% reduction in total company first-quarter sales and reduced our total consumer and flavor solutions segment sales 5% and 1%, respectively. [...] The lower operating income from China impacted the total company's growth in both adjusted operating income and adjusted earnings per share by 10%.
The fiscal first quarter ran through February, a period that included the most aggressive social-distancing efforts in parts of China but none of the subsequent moves that started in the U.S. in mid-March. While McCormick's experience in that market helped inform its strategies as COVID-19 spread to other geographies, China was a special case.
The stay-at-home orders didn't afford many consumers the opportunity to stock up on pantry items, for example, so sales and profits were hit especially hard. Management says it is seeing demand pick back up now as lockdown restrictions are being lifted, but China should continue pressuring global results through at least the fiscal second quarter.
Mixed effects ahead
We know from our sales performance during recessionary periods [that] we benefit from consumers eating at home. Our constant currency consumer-segment organic sales growth in 2001 and 2009 was 4% and 3%, respectively. On the other hand, in the away-from-home part of our flavor solutions segment, which represents approximately 20% of our total company sales, we are now seeing reduced demand from our food service customers as COVID-19 measures have eliminated dining-in services and limited restaurants to carry-out for delivery only.
McCormick gets roughly one-fifth of its sales from restaurant chains, and most of that demand has dried up due to temporary closures that started in March. Yet challenging economic periods tend to boost the broader business as consumers opt to save cash by eating at home more often.
The company still sees a volatile period ahead, so executives pulled the 2020 outlook that called for modest sales growth and a slight drop in profitability this year. Broadly speaking, they expect an initial surge in pantry-stocking demand to give way to modestly elevated sales volumes for the consumer business. Offsetting those gains will be sharp losses among restaurant partners and continued pressure from China.
Head-turning March data
[F]or the week ended March 15, scanner sales for the total McCormick U.S. branded portfolio grew 65%, with all major categories up double or triple digits.
Sales soared during the start of the COVID-19 mitigation efforts in the U.S. as consumers stocked up in preparation for more at-home cooking. Stocks and broth volumes doubled, McCormick said, and vanilla flavoring sales jumped 54%.
That surge showed no signs of slowing with volumes rising nearly 90% overall in the following week. While McCormick is expecting this boost in consumer foods demand to subside, the company is doing all it can, including a new marketing campaign and social media outreach, to help its customers find satisfying ways to use their spice and flavoring products through this prolonged period of at-home eating.
"We expect some level of elevated demand to continue," Kurzius said. "Schools are closed, people are staying at home, and that contributes to real incremental at-home consumption."