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McCormick's Stock Split Isn't the Best Reason to Like the Company

By Demitri Kalogeropoulos – Oct 2, 2020 at 10:30AM

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Sales are still rising as consumers build new cook-at-home habits.

The trend toward at-home eating might be just warming up.

Investors were looking forward to McCormick's (MKC) third-quarter earnings results, but were still treated to surprisingly strong operating numbers this week. The spice and flavorings giant beat sales and profit expectations while announcing a bullish prediction for the full 2020 year.

A mother and daughter cooking together.

Image source: Getty Images.

Sales balance is back

Overall sales rose 8% to comfortably exceed the 5% uptick that Wall Street was targeting. But the better news showed up in McCormick's underlying demand trends.

Its consumer segment, which caters to supermarket chains and other food retailers, grew 15% thanks to a continued lift from COVID-19 shifts in eating behavior. That marked a slowdown from the prior quarter's 26% spike, but growth is still elevated.

Meanwhile, McCormick's flavorings segment, which serves restaurants and packaged food companies, posted an impressive rebound. Sales fell just 1% after accounting for currency exchange shifts. That division had dropped 16% in the second quarter, and management predicted a potentially sluggish rebound ahead as restaurants continued seeing reduced demand.

Yet McCormick was able to almost fully erase that shortfall by selling more merchandise to packaged food giants. Executives credited their diverse portfolio for helping generate the overall strong returns. "These impacts continue to demonstrate the strength and diversity of our offering," CEO Lawrence Kurzius said in a press release.

Handling extra costs

McCormick saw costs rise in a few areas this quarter, including marketing and coronavirus-related safety measures. But its finances continued to shine. Gross profit margin inched higher to partly offset rising selling expenses. Adjusted operating income improved to $273 million, or 19.1% of sales, compared with $261 million, or 19.7% of sales, a year ago.

The company's bottom-line profit results also trailed revenue gains slightly, with adjusted net income rising 4.9% compared with the 8% sales boost. "The last few months have been an extraordinary period," Kurzius said, "and the COVID-19 situation continues to evolve daily."

Looking ahead

Despite that stubborn volatility, Kurzius and his team have seen enough demand data to comfortably reinstate their sales outlook after pulling it during the pandemic's early phases. McCormick now sees organic sales growth landing near 6% in fiscal 2020. That's about double the pace executives had initially projected before the pandemic struck. It's also above the company's long-term annual growth goal of roughly 5%.

Management had mostly positive things to say about how it's seeing demand develop through the reopening of restaurants in key markets like the U.S. Executives still expect at-home cooking trends to stay elevated into 2021, and their latest performance shows that demand is also improving at food service retailers and through packaged-foods giants.

These positive factors all helped convince McCormick to announce its first stock split since 2002. While the two-for-one split won't have any effect on the value of the overall enterprise, executives made sure to note that it reflects their growing optimism about the trajectory of the business as they close out a strong fiscal 2020.

Demitri 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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