Despite the pandemic waning, the cooking-at-home boom is far from over. McCormick (MKC -0.38%) recently announced strong second-quarter earnings results while lifting a few of its fiscal year targets.
The spice and flavorings giant is getting a persistent lift from consumer interest in self-prepared meals even as its restaurant customers are enjoying rebounding demand. Those trends are paving the way for another great financial year for the owner of brands like French's mustard and Cholula hot sauce.
In a call with Wall Street analysts last week, CEO Lawrence Kurzius and his team broke down the factors that they see driving record sales in 2021. Let's look at a few takeaways from McCormick's earnings call presentation.
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1. McCormick is showing industry leadership
McCormick can reasonably claim a leading position in the attractive consumer packaged foods niche. Its latest 8% sales boost outpaced peers like PepsiCo (PEP -0.41%) and General Mills (GIS -0.32%) thanks to strength across its portfolio of brands that cater to consumers and restaurants alike. The spice, flavorings, and condiment giant is on track for another year of double-digit percentage sales growth, in fact.
Executives credit a "sustained" new interest in cooking at home for creating that positive selling environment. But the bigger factors include competitive assets like branding, innovation, and a stellar product portfolio. "We are driving growth," Kurzius said, "through executing our long-term strategy, actively responding to consumer behavior and capitalizing on new opportunities."
2. McCormick needs to manage inflationary pressures
McCormick's biggest challenge today is handling cost spikes that might pressure sales and earnings for the entire industry. "We're seeing broad-based inflation across our various commodities, packing materials, and transportation costs," Kurzius said.
The best investor returns will flow through those companies that can best manage these increases, mainly by raising prices. It's too early to tell how well McCormick will fare since those hikes won't apply until later in 2021. But there are good reasons to believe the company can outperform peers in this arena, too. Its portfolio already tilts toward more premium products like sauces, flavorings, and condiments, which are less sensitive to price boosts. McCormick's global sales base also provides efficiencies that many rivals can't match.
Keep an eye on gross profit margin over the next few quarters for confirmation that the company is executing well through unusually aggressive cost increases.
3. The case for a persistent lift
The key question going forward is whether shareholders can reasonably expect faster growth after the pandemic than the 5% to 7% annual gains McCormick was targeting before COVID-19 struck. Management believes they can.
The company has a much bigger pool of engaged customers to market toward today, for one. And it enjoys a stronger portfolio thanks to the recent addition of Cholula hot sauces. Finally, the industry might be on a fundamentally improved growth path. "Consumers have formed a new habit," Kurzius said. "They invested in new kitchen appliances and ... want to cook versus hav[ing] to cook."
That bright long-term outlook helped convince the company to issue modest upgrades to both the sales and profit forecasts for 2021 while cautioning that the second half of the year will face especially hard year-over-year sales comparisons.
Investor takeaway
Investors shouldn't worry much about that likely growth slowdown. McCormick is positioned well to grow earnings at a double-digit percentage rate this year while sending more cash to shareholders through dividends and stock buybacks. Profitability should increase over time, too, as the company capitalizes on its latest acquisitions.
These factors point to strong investor returns for those holding this stock, which has so far stayed out of the recent stock market rally and therefore looks like an even more compelling buy today.
