Sales are up across the consumer packaged-foods industry as the coronavirus pandemic lifts the frequency of at-home eating. Investors have assumed that this increase will be a strong, but temporary, boost for McCormick (NYSE:MKC), which sells pantry staples like seasonings and condiments.
But in a conference call with Wall Street analysts last week, McCormick CEO Lawrence Kurzius and his team said there are good reasons to believe the trend could stick around even after consumers return to their normal habits. These factors could support the business well into 2021.
Let's look at a few highlights from that third-quarter earnings call presentation.
Consumers are forming new habits
"The significant shift to consumers eating more at home is persisting long enough that it has become a habit." -- Kurzius
Sales growth did slow versus the peak shutdown period between April and June, but McCormick still notched impressive gains. Its consumer segment jumped 15% thanks to a 13.6% volume spike and 1.5% higher average prices.
McCormick is even more excited about the indications that demand won't quickly return to the low single-digit uptick that the company was posting before the pandemic. Markets like China, which are further along in recovering from COVID-19, continue to see elevated cooking-at-home time even as restaurant traffic returns to normal.
The U.S. segment is seeing a surge of repeat buyers, and McCormick's research suggests that's a sticky behavior. "Consumers are cooking more from scratch, enjoying the cooking experience, and adding flavor to their meal occasion," Kurzius said. "We believe this will continue globally and thus further benefit our consumer segment."
Struggles for market share
"[That] our sales increase was lower than the U.S. [retail] consumption growth [was] attributable to a few factors." -- Kurzius
As strong as McCormick's growth was, it amounted to slight losses in market share in the key U.S. geography. Management said this gap was driven mainly by manufacturing challenges. Production was so strained in some areas that the company had to stop making a few products to focus on the most in-demand items, like vanilla extract, steak seasoning, and hot sauces.
Still, McCormick said it gained share in most of its core product categories. Management is directing more cash toward ramping up production in the U.S., too, and plans to have the manufacturing bottlenecks eased by the end of the year.
Predicting the future
"We do not expect consumption to continue at the highly elevated level of our third quarter." -- Kurzius
Expectations for a continued growth slowdown are reflected in McCormick's reinstated sales outlook that calls for organic revenue to rise by about 6% for the full 2020 year. That's better than the 2% uptick management expected before the pandemic struck. But it's significantly weaker than the near double-digit increase the company has booked in each of the last two quarters.
McCormick sees its sales to restaurants, which amount to about 20% of the business, staying weak well into 2021 as that industry shrinks under pandemic pressures. Costs like its ramp-up in manufacturing will restrict earnings growth, too, so that adjusted profits rise only slightly faster than the expected 6% overall sales increase.
Yet the bigger takeaway is that sales will grow above McCormick's long-term target in 2020 and might repeat that performance next year with help from a broader manufacturing base and elevated at-home cooking time.