McCormick (MKC +1.68%) will announce its latest earnings metrics on Thursday, Jan. 27, and investors have modest expectations heading into that report. Yes, the spice and flavorings giant is on track to continue growing both sales and earnings following a pandemic-related demand spike. But revenue gains are slowing, and inflation threatens to eat away at profit margins.
On the bright side, McCormick is likely to navigate through those challenges and continue providing solid returns for long-term investors. Let's take a closer look.
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Sales updates
The revenue outlook is bright. McCormick raised its sales forecast for the second time in a row last quarter, in fact, after revenue grew 8%. Most investors are looking for slightly faster gains this time with sales rising 10% to roughly $1.7 billion. There's a lot of noise in that growth figure, including currency exchange-rate shifts and demand swings caused by the pandemic.
That's why it makes sense to follow two-year growth rates on an organic basis. That metric stood at a healthy 17% last quarter. CEO Lawrence Kurzius and his team have said they expect gains to stay slightly elevated for some time given that the pandemic has accelerated demand for at-home cooking. McCormick is positioned to benefit from these trends through its wide portfolio of spices, sauces, and flavorings.
Raising prices
Investors weren't thrilled to hear back in October that McCormick's core consumer business is getting less profitable. The margin pressure is coming from rising costs on inputs, transportation, and labor, and those expenses likely continued spiking in Q4. "We are experiencing the highest inflationary period of the last decade or even two," Kurzius said at the time.
We'll learn on Thursday whether McCormick felt comfortable passing along most of those rising costs to consumers in the form of price increases. Investors will also see whether those price hikes are hurting sales volumes.
Watch for success on this score to show up in a steady or rising operating profit margin. That core profitability metric had been heading toward 20% of sales before the pandemic but is now falling back toward 15%. A rebound in this area is likely needed for the stock to break out of its recent trend of underperforming the wider market.
Looking ahead
Investors are eager to hear management's initial outlook for the fiscal year ahead. Going into the report, most Wall Street pros are forecasting a significant slowdown with sales inching higher by less than 3% in 2022. That prediction will change to reflect McCormick's latest trends and the official forecast from executives.
There are good reasons for optimism on the profit and sales fronts. McCormick's portfolio tilts toward high-margin flavorings like condiments, which should hold up well during inflationary price boosts. The costs for dining out have soared, too, meaning the company has room to increase its prices while still offering value compared to away-from-home eating.
Sure, revenue trends are likely to fall below the high single-digit range that the company logged through most of the past two years. But the dividend giant is still gaining market share in an attractive industry while delivering excess cash to shareholders. Once its profit margins rebound, the stock price should start reflecting that positive long-term outlook.
