We might be at the start of a fundamental shift toward more at-home eating, and McCormick (MKC 1.44%) is ready to capitalize on the trend. The spice and flavorings giant just reported strong sales results to kick off its new fiscal year. Better yet, there are tantalizing reasons to expect robust investor returns ahead even as the pandemic threat fades.
In a recent earnings call, CEO Lawrence Kurzius and his team told Wall Street analysts why McCormick is expecting faster sales growth in 2021.
Let's look at a few highlights from that chat, with an eye toward whether McCormick is a good buy for investors today.
Image source: Getty Images.
The factors behind the sales beat
"Our volume and product mix, acquisitions, and pricing each contributed to the [sales] increase," CFO Mike Smith said.
Revenue growth was a surprisingly strong 20% in the first quarter, thanks in part to the comparison with a depressed year-ago period that included intense economic lockdowns in China. But McCormick landed several sales wins, too, with volume rising across its core brands and newly acquired franchises like Frank's, French's, and Cholula.
Organic sales jumped 16%, management said, as consumers continued cooking more at home while tilting demand toward premium flavorings. Volume was up, and so was average pricing. McCormick also achieved better in-stock positioning at retailers after struggling to balance supply with demand through most of 2020.
A shift in perspective
"Consumers' interest in cooking has increased in recent months versus the end of last year because they want to cook versus have to cook," Kurzius said.
McCormick is always tracking its customers' preferences so it can stay ahead of any demand shift. Those surveys, along with recent sales, suggest positive changes in cooking attitudes that might support years of faster sales growth ahead.
Image source: McCormick investor presentation.
About half of the customers it surveyed now see home meal preparation as more of a "want" than a chore, marking a shift even from late 2020. People cited social and mental-health payoffs, in addition to physical health, safety, and budgetary benefits. And two-thirds of consumers plan to at least maintain their current level of home cooking even after the pandemic threat recedes.
Accelerating growth
"Our fundamentals, momentum, and growth outlook are stronger than ever," Kurzius said.
McCormick isn't relying just on industry growth to drive its results in 2021 and beyond. It has a packed pipeline of new flavorings on the way that will be supported by increased marketing spending and improved packaging. Its Cholula and FONA acquisitions join the French's and Frank's purchases in filling out its portfolio, especially in the higher-margin condiment space.
These strengths combined to convince management to raise its growth outlook to between 6% and 7% this year, compared to 5% in fiscal 2020. Earnings should climb a bit faster despite elevated COVID-19 costs, and cash flow will be impressive following McCormick's first-ever year of over $1 billion of free cash generation.
Much of that haul will go toward investing in the business, paying down debt, and funding a growing dividend payment in 2021. Investors' returns should also soon start getting a contribution from stock buybacks. Along with market share gains, rising profitability, and a favorable selling environment, those cash returns are yet another reason to like this growth stock today.
