Why Is McCormick (MKC) Up 5.1% Since Last Earnings Report?

It has been about a month since the last earnings report for McCormick (MKC). Shares have added about 5.1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is McCormick due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

McCormick Q2 Earnings Lag Estimates, Cost Inflation Hurts

McCormick reported dismal second-quarter fiscal 2022 results, with the top and the bottom line decreasing year over year. Sales and earnings missed the Zacks Consensus Estimate.

During the quarter, the company battled a tough global environment, including the ongoing cost inflation and supply chain issues. Major disruption across China owing to COVID-related lockdowns and the conflict in Ukraine were also hurdles. That being said, strength in its broad global portfolio and the effective pricing actions offered some respite. The company is on track to capitalize on a sustained shift to cooking more at home, higher digital engagement, clean and flavorful eating and trusted brands.

Management updated its fiscal 2022 view to reflect the adverse impact of foreign currency rates, increased cost pressures and associated pricing actions. The revised outlook also considers the adverse impact of COVID-induced lockdowns in China, the conflict in Ukraine and McCormick’s growth momentum. Management also highlighted that it anticipates a favorable impact from optimizing its debt portfolio.

Quarter in Detail

Adjusted earnings of 48 cents per share declined from 69 cents in the year-ago quarter. The downside stemmed from reduced adjusted operating income. The metric missed the Zacks Consensus Estimate of 65 cents per share.

This global leader in flavor generated sales of $1,536.8 million, down 1% year over year. This includes an unfavorable impact from currency translation of 1%. Constant currency (cc) sales were in line with the year-ago quarter, reflecting 7% positive impact from pricing actions countered by a 7% decline in volume and product mix. Volume and product mix were hurt by the lapping of the year-ago quarter’s U.S. trade inventory replenishments and disruption related to COVID-induced restrictions in China. The exit of low-margin business in India and the conflict in Ukraine also hurt the metric. The top line missed the Zacks Consensus Estimate of $1,617 million.

Compared with 2019 levels (pre-pandemic period), second-quarter sales increased 6% at a constant currency compounded annual growth rate (CAGR) basis.

The company’s gross profit margin contracted 550 basis points to 34%, thanks to increased material and transportation cost inflation and a negative product mix. These were somewhat countered by cost savings from the CCI program and pricing actions.

Operating income was $157 million, down from $237 million reported in the year-ago quarter. The downside was caused by gross margin contraction and increased distribution expenses. These were somewhat offset by the positive impact of CCI-led cost savings and reduced transaction and integration expenses.

Segment Details

Consumer: Sales went down 8% to $866.1 million. On a constant currency basis, sales fell 7% owing to reduced volume and product mix, somewhat offset by pricing actions across all three regions. Consumer sales in the Americas fell 4%. Consumer sales in Europe, the Middle East and Africa (EMEA) fell by 18%. Consumer sales in the Asia/Pacific market slumped 18%.

Flavor Solutions: Sales in the segment increased 10% to $670.7 million. On a constant currency basis, sales grew 11%, courtesy of the Americas and EMEA regions. Management highlighted that pricing actions contributed to sales across all three regions. Flavor Solutions sales in the Americas and the EMEA region increased 12% each. However, sales in the Asia-Pacific region fell 8%.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $325.8 million, long-term debt of $3,920.3 million and total shareholders’ equity of $4,615.1 million. For the six months ended May 31, 2022, net cash provided by operating activities amounted to $154.4 million.

Fiscal 2022 Outlook

Management updated its sales, operating income and earnings per share (EPS) outlook for fiscal 2022. The company expects foreign currency translations to have an unfavorable impact of two-percentage points on net sales, adjusted operating income and adjusted EPS in 2022. Earlier, it had expected a one-percentage point unfavorable impact of currency rates on net sales, adjusted operating income and adjusted EPS.

The company now expects sales growth of 3-5% (up 5-7% at cc) year over year. Earlier, management expected to achieve sales growth of 3-5% (up 4-6% at cc) year over year. McCormick anticipates growth from solid brands, new products, brand marketing, category management and differentiated customer engagement. The company’s pricing actions and cost savings will likely offset projected inflationary pressures over time.

Adjusted operating income is expected to be flat to 2% growth (up 2-4% at cc). Prior to this, management expected adjusted operating income growth in the band of 7-9% (up 8-10% at cc). Adjusted EPS are now expected to be $3.03-$3.08, compared with previous guidance of $3.17-$3.22. The company had reported an adjusted EPS of $3.05 in fiscal 2021. The revised adjusted EPS view reflects a projected decline of 1% to a 1% increase (up 1-3% at cc).

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

Currently, McCormick has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

McCormick has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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