McCormick's (MKC -0.38%) growth rate is heating up. The packaged foods specialist last week upgraded its sales outlook for a second straight quarter thanks in part to booming demand for its Cholula and Frank's Red Hot sauces.
Home cooking trends aren't retreating after the pandemic put a new premium on spices and flavorings. Yet in a conference call with Wall Street analysts, CEO Lawrence Kurzius and his team also described some mounting cost and supply chain challenges for late 2021 and into 2022. Let's look at the biggest takeaways from that presentation.
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1. Growth checkup
McCormick grew sales by 8% compared to last year and 17% compared to the same period in 2019. That expansion reflected solid demand, especially given the tough comparison with the pandemic period in 2020. "Our third quarter results reflect a robust and sustained growth momentum," Kurzius said, "as we delivered organic sales growth on top of our exceptional third quarter performance last year."
Almost all of the gains came from recent brand acquisitions like Cholula, though. Stripping out those products, volume rose by less than 1% and prices were flat overall. Executives blamed supply chain challenges for the weak year-over-year results while stressing the fact that growth is strong (up double digits) on a two-year basis.
2. Spiking costs
The news wasn't as good on the earnings front. Operating income jumped 32% in McCormick's flavor solutions segment that caters to restaurants and packaged foods companies. But its core consumer segment, which sells products to retailers like Walmart, posted a 10% profit drop.
Executives highlighted surging costs on everything from transportation to packaging. Those costs weren't offset by rising prices, either, as those hikes tend to lag behind a bit. Management is confident that McCormick will navigate through this period just as it has in past periods of rising prices.
Still, this environment is unusually challenging. "We are experiencing the highest inflationary period of the last decade or even two," Kurzius said.
3. Looking ahead
McCormick bulked up its inventory position, which means fewer in-stock challenges during the next several months. That initiative hurt cash flow and earnings in the short term but should help the chain grow quicker than the wider industry through late 2021. In fact, management raised its sales outlook for a second straight quarter.
However, the profit picture darkened slightly thanks to those spiking costs. McCormick will start raising its prices to reflect inflation in the fourth quarter, yet gross profit margin will decline this year. That's likely a short-term issue, and investors should instead follow metrics like market share as they gauge the strength of this business. There's no sign of challenges in that area, after all, and McCormick has big plans to continue capitalizing on the success of its new hot sauce brands.
"We have a strong foundation and a balanced portfolio which drives consistency in our performance," Kurzius said. After a modest earnings slowdown in the second half of 2021, strong demand implies that McCormick will quickly return to that path of margin expansion sometime next year.
