McCormick (MKC 0.09%) shareholders are in for a busy week. The spice and flavorings giant announces its latest earnings results in just a few days in a report that will answer some major questions swirling around the business. Shares have trailed the market by a wide margin so far in 2021 even though McCormick is enjoying solid growth.
Wall Street has instead focused on worries like rising costs and an impending post-pandemic slowdown. Let's look at how McCormick might clear up those concerns in its third-quarter earnings announcement on Thursday, Sept. 30.
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Will McCormick sales gains hold steady?
McCormick's last report showed demand remained unusually strong for its at-home cooking products. Sales were up 8% through late May, which is roughly equal to the boost peer PepsiCo has seen so far in 2021.
McCormick's business is benefiting from that industrywide demand lift, but also from major acquisitions like Cholula Hot Sauce and the French's and Frank's RedHot condiment franchises. "We are capitalizing on accelerating consumer trends," CEO Lawrence Kurzius said back in early July as the company lifted its 2021 outlook. Most investors are looking for sales gains to hold steady, landing at about 7% for the fiscal third quarter.
Did price boosts affect McCormick's volume?
McCormick recently started rolling out significant price increases to account for higher commodity costs and rising transportation expenses. This week's report will be a test of its pricing power in that way, with rising volumes demonstrating the company's strength. Conversely, if volumes slowed more than management had projected, then McCormick might be in for a tough second half of 2021 as it aims to balance market share against profitability.
MKC Operating Margin (TTM) data by YCharts
There's no sign of a challenge yet on this score, though, and in fact, margins are rising thanks to McCormick's premium products and a demand tilt toward condiments and sauces. I'd expect that positive trend to carry through the rest of the year.
What will McCormick's adjusted outlook say?
We'll learn on Thursday whether Kurzius and his team have seen any data over the last few weeks that support an adjustment to their 2021 outlook. Heading into the report the company is aiming for sales gains between 8% and 10% after adjusting for currency shifts. Earnings should expand at a slightly faster rate due to favorable factors like higher spending by food shoppers.
Factors like a further tilt toward its premium spices and flavorings or a positive response to price hikes might convince management to boost its growth outlook for a second straight time. On the other hand, the operating forecast might become more conservative given further COVID-19 outbreaks and rising supply chain costs.
But McCormick's long-term outlook seems bright, regardless of any changes to that short-term forecast. The company is on pace to boost sales and earnings by double-digit percentages this year on top of 2020's strong results. Its annual free cash flow has recently crossed the $1 billion mark, too, which should give management plenty of flexibility as it pays down debt, boosts the dividend, and starts directing cash back toward stock repurchases in the quarters to come.
