Spices and seasonings business McCormick & Company (MKC 4.42%) delivered a mixed set of third-quarter earnings Thursday morning, but disappointed the market by guiding toward the lower end of its full-year earnings-per-share guidance range. The company's underlying revenue and earnings growth continues to be masked by unfavorable currency movements. Meanwhile, just as McCormick is achieving success in dealing with some of the weaker areas of its business, it's seeing weakness in its majority-owned India spice business, Kohinoor, and the ill effects of a decline in the Mexican peso. Let's take a closer look at what's going on.
McCormick's third-quarter earnings
First, a look at the headline numbers:
- Third-quarter net sales of $1.06 billion matched analyst estimates for $1.06 billion.
- Third-quarter adjusted EPS of $0.85 missed analyst estimates for $0.87.
Now the guidance:
- Full-year constant-currency sales growth expected at the upper end of a 4% to 6% guidance range.
- Full-year adjusted EPS expected at the lower end of $3.47 to $3.54; analyst estimates are for $3.52.
- Full-year adjusted operating income growth expected to be at the lower end of a 6% to 7% guidance range.
In a nutshell, sales were in line with analyst estimates, but the company missed earnings estimates by $0.02. Moreover, reported EPS came in $0.09 lower at $0.76. The reason? McCormick took $15 million in special charges in the quarter, $2 million of which was due to previously announced streamlining action in North America and Europe -- no problem there.
However, McCormick decided to discontinue the sale of some of its lower-margin basmati rice products, and consequently took a $10 million non-cash impairment charge in reducing the value of the Kohinoor brand. It's a non-cash item, but investors will be more concerned with the $3 million charge taken due to an inventory writedown with the basmati rice products.
In addition, the full-year guidance cited above excludes the $0.36 of special charges expected for the full year. So, whichever way you slice it, McCormick's updated guidance proved disappointing to investors.The stock was down about 4% at 2:40 p.m.
Underlying sales growth
The problems at Kohinoor overshadowed an otherwise decent quarter for the company. As noted above, management is guiding toward the upper end of its constant-currency sales growth range of 4% to 6%. Indeed, constant-currency sales growth came in at 7% in the third quarter.
It's an impressive performance given that McCormick produced just 3% local currency sales growth in 2014. In other words, its plans to accelerate sales growth in 2015 are working.
However, the company's reported sales growth came in at just 2% compared to the third quarter last year -- a further indication of how unfavorable currency movements are reducing its earnings growth prospects. In fact, in constant-currency terms consumer business sales and industrial business sales came in with 6.9% and 7.3% growth in the quarter, but adverse currency movements reduced reported growth figures to 1.4% and 1.6%, respectively.
As you can see in the chart below, reported sales growth in 2015 looks a lot weaker than the 4% to 6% constant currency growth that management expects for 2015.
Source: McCormick & Company presentations.
In addition, McCormick is doing well with other objectives. For example, it generated 2% growth in consumer sales in the Americas, previously a problem area. It's an indication that the company's investments in new product innovation, brand awareness, and marketing in the consumer segment -- partly to fend off competition -- are working.
The takeaway
All told, the weakness in Kohinoor overshadowed some of positive developments in the quarter -- particularly the 7% constant currency sales growth in the quarter. On the earnings release, management outlined a "more conservative view" on adjusted operating income growth for 2015 "due in part to weak Kohinoor results." The question for investors is how long the weakness in Kohinoor will last and if it will continue to counteract positive developments elsewhere with McCormick's product range.
