Investors have some good reasons to celebrate McCormick's (MKC 0.56%) fiscal first-quarter earnings report that covers the selling period through late February. A key concern heading into the announcement was that demand trends have been slowing in its consumer sales division as more people venture back out to restaurant dining. Inflation is also forcing the packaged food specialist to be creative about raising prices and cutting costs.
But McCormick navigated through those challenges to post quicker revenue gains compared to the previous quarter. And management is predicting that the company will still achieve its sales and earnings targets in 2022 despite inflation and supply chain challenges.
Let's dive right in.
Spicy sales trends
McCormick managed to accelerate growth compared to the previous quarter, when sales were up 18% on a two-year basis. Revenue rose 4% this quarter, which might look small compared to Q4's 13% increase. But that recent growth came on top of a 20% spike a year earlier.
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The gains were tilted toward the restaurant division, which expanded 14% after accounting for currency exchange swings. The consumer segment declined 2%, in contrast, because of slightly weaker demand for at-home cooking flavorings compared to earlier phases of the pandemic.
The performance met expectations and reflects a business that's growing faster than it was before the pandemic struck. CEO Lawrence Kurzius said in a press release that the results "demonstrat[e] our broad and advantaged global flavor portfolio as well as the effective execution of our pricing actions."
Boosting prices
The company did see pressure from soaring costs on inputs, wages, and transportation. Gross profit margin shrank by nearly 3 full percentage points, in fact, to 37% of sales. Operating income declined to $207 million from $236 million despite the expanding sales base.
McCormick is taking a deliberate approach with its price increases so that it doesn't open the door to the competition. But management reiterated their prediction that these boosts will eventually cover all the extra costs mounting up in the manufacturing and supply chains today. "We...expect to fully offset cost pressures over time using pricing and other levers as we have in the past," Kurzius said.
Looking ahead
The best news in the report surrounds McCormick's latest outlook and how little that has changed since it was first released in late January. Executives still see the robust demand for eating at home helping to push sales up roughly 5% this year following last year's 11% boost.
And while many of its peers have reduced their earnings forecasts, McCormick is doubling down on its outlook. Operating profit will rise by between 8% and 10% after accounting for currency exchange rate shifts, meaning the company will likely see increasing margins in 2022.
Combined with the prospect of solid growth following last year's spike, that earnings news is a great sign for shareholders. McCormick is expanding its global business in both the consumer and restaurant divisions, its recent hot sauce acquisitions are boosting sales and profits, and its price increases are tracking along with inflation. Shareholders should be thrilled with those wins, which help explain why McCormick is such an attractive food stock to have in your portfolio.
