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McCormick Looks More Attractive After Strong Q2 Results

By Demitri Kalogeropoulos – Jun 29, 2020 at 7:00AM

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The spice and flavorings giant just reported double-digit sales growth.

McCormick (MKC -0.83%) is handling an unprecedented spike in demand right now. The global spice and flavorings giant announced fiscal second quarter earnings results this week that surpassed investors' high expectations as the COVID-19 pandemic powered sustained increases in at-home cooking.

McCormick did see a sharp drop in sales to its restaurant and foodservice partners. However, its soaring consumer segment, plus surging cash flow, imply solid returns for investors ahead.

A tale of two segments

As expected, McCormick reported pressure from the closing of most of the global restaurant industry in April and May. Sales in its flavor segment dropped 18% globally. But the consumer segment, which represents a bigger portion of its business, soared. Sales to retailers like supermarket chains and warehouse stores jumped 28% after accounting for exchange rate shifts.

A young woman adds spice to a dish.

Image source: Getty Images.

As a result, overall organic sales rose by 10%. McCormick's previous quarterly report showed a 1% decline and the company had been growing at about a 2% pace before COVID-19 began affecting the business in February. "Taken together," CEO Lawrence Kurzius said in a press release, "these impacts demonstrate the diversity of our offering."

Surging profits

The news was more uniformly positive with respect to McCormick's finances. A shift toward high-margin products like home flavorings and sauces, combined with cost-cutting efforts, pushed gross profit up to $580 million, or 41.4% of sales, from $509 million, or 39.1% of sales a year ago. Operating margin expanded by a similar 2.4 percentage points and helped push operating income up 21% to $260 million.

McCormick saw cash flow jump to $356 million from $314 million over the past six months. "Our ability to meet the increased consumer demand and execute during a volatile quarter highlights our agility and strong foundation," Kurzius explained.

Still no 2020 outlook

Management declined to issue a detailed fiscal year outlook, citing unpredictable variables like global economic growth trends and the path of new virus outbreaks. Executives did say they expect their consumer business to show significant growth for the year while the flavor segment gradually marches back toward growth over the next six months.

McCormick affirmed its broader long-term outlook that calls for annual sales gains of around 5% and significantly faster profit growth. That formula should leave plenty of room for extra cash returns to shareholders in the form of stock buybacks and dividends. Once the crisis passes, the company might even contemplate further large acquisitions like its recent purchase of the French's and Frank's condiment franchises.

In the meantime, executives said the pandemic has had a generally favorable impact on the factors it relies on for global growth, including consumer interest in healthy, flavorful home cooking. "These long-term trends have not only remained intact during this crisis," Kurzius said, "they have accelerated."

Investors can't count on the type of double-digit sales gains they saw this quarter continuing much further into fiscal 2020. But McCormick seems set to post faster sales and profit increases this year. The company also has a valuable opportunity to introduce millions of new customers to its spice and flavorings products, with an aim toward winning more loyal cooking fans.

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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