McCormick (MKC +2.00%) investors are in for a treat in just a few days. The spice and food flavorings giant will soon issue its first-quarter earnings report, with key updates on growth trends and profitability through the recent inflation spike.
Expectations are building up heading into that announcement, which will also include an update on the outlook, both for 2022 and over the long term.
Let's preview that report, slated for Tuesday, March 29.
NYSE: MKC
Key Data Points
Still winning
McCormick entered fiscal 2022 with solid momentum. Sales jumped 13% for the full year and 11% in the fiscal fourth quarter. Management said in a conference call with investors that this boost was powered by strength both in its consumer segment, which caters to home cooks, and its enterprise division which sells to restaurants. "We are winning in all channels," CEO Lawrence Kurzius said in late January.
Investors are expecting those wins to continue into early 2022, although the company is facing tough comparisons with a year-ago period that saw revenue soar 22%.
Sales should take a modest step backward from that level, but the key trend to follow is two-year growth. Revenue was up 18% on that basis last year and should continue expanding at around that rate if demand held up for its spices, condiments, and hot sauces.
Higher prices
Inflation began to impact the business in Q4 but has sped up in recent weeks as prices jumped for food products, packaging, transportation, labor, and fuel. McCormick needs to find ways to offset these spikes through a mixture of price increases and cost cuts if it is going to keep boosting earnings at a faster rate than sales.
Image source: Getty Images.
That's why investors should follow adjusted operating margin for signs of stress. That metric slipped to 17.4% of sales last year from 18.2% a year earlier and will likely shrink a bit more in 2022. Management said in late January, though, that this slump will just be temporary. "We expect to ... fully offset cost pressures over time," Kurzius said. Watch for details on management's plan to execute this strategy in 2022.
A new outlook
Investors are worried that recent geopolitical developments might knock McCormick off of its growth pace. Heading into the report, executives were projecting that revenue will expand at about a 5% rate in 2022. Yes, that boost would represent a slowdown from the prior year's 11% spike. But it still implies a business with impressive growth prospects in the consumer-packaged food space.
This coming week's report should add context around the 2022 sales trends, including how much growth will be coming simply from price increases. McCormick aims to deliver annual earnings growth that approaches 10%, an ambitious target for such a large and stable business. Plus, the company will likely be directing some of its solid cash flow toward a rising dividend. That's a formula for strong shareholder returns over time.
McCormick has good reasons to take a cautious outlook for the rest of 2022 given rising prices in the U.S. and the uncertain selling environment across parts of Europe. But the spice giant should continue outgrowing the industry over the next few years while producing industry-leading earnings gains. Those wins make the stock a good one to hold through any type of market.
