McCormick & Company (MKC) Earnings: Sales Growth Predicted for 2015

By Markets Fool.com

McCormick & Company delivered a good set of fourth-quarter earnings that came in slightly ahead of estimates. However, investors will be equally interested in management's guidance. Let's take a look at the underlying trends in the earnings report that came out Jan. 28 and management's outlook for 2015.

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McCormick delivers fourth-quarter earnings
Adjusted EPS came in at $1.16, beating analyst estimates by $0.02, but don't get too excited. On the earnings call, CEO, Alan Wilson outlined that the company benefited from a lower tax rate and an "excellent result" from its joint venture in Mexico.

In reality, sales and operating income were lower than management's projections in the quarter, according to Wilson on the earnings call. He cited two principle reasons for the disappointing operating income results in the quarter:

  • A competitive environment in several of its markets.
  • Weak sales to quick-service customers in China.

Moreover, Wilson began summing up the results for the full-year by saying:

We met our fiscal year 2014 sales objectives and exceeded the cost savings target. However, adjusted operating income growth at 3% was below our initial range of 6% to 8%. A major reason was the more rapid growth in international markets, but slower growth in more profitable U.S. businesses.

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In other words, trends in the fourth quarter and the full year were pretty consistent. Sales are being pressured by increased competition in the U.S. consumer market, and weak end demand from its industrial customers.

A quick look at segmented revenue demonstrates how sales growth slowed down in 2014 -- particularly in the consumer segment.

Source: McCormick & Company presentations

Growth slowing; margins OK
The consumer segment generated nearly 66% of sales in the fourth quarter and had a fourth-quarter segment operating-income margin of nearly 22% -- nearly three times as high as the industrial segment's 7.5% operating income margin during the same period. As such, the consumer segment generated 5.6 times the amount of operating income of industrial.

With this in mind, the slowing sales growth in the consumer segment is a particular concern. When speaking on the earnings call, Wilson outlined the competitive pressures coming from U.S. retailers "bringing smaller brands on the store shelves." It's a move that has differentiated the spice and seasoning market, because the smaller brands include "value priced products, ethnic brands and premium as well as organic items," Wilson said.

However, while sales growth is slowing, McCormick has managed to hold margins up in both its segments. Incidentally, the consumer segment has a sawtooth pattern -- something to consider.

Source: McCormick & Company presentations

Innovation to the rescue
McCormick's management believes that product innovation is the key to maintaining and growing sales. Indeed, on the earnings call, Wilson said that "our 2015 sales growth projection includes a strong impact from innovation."

Moreover, he argued that the company was in "a much better position" than it was a year ago within the U.S. consumer segment. His optimism seems to be based on new product development, and the company's efforts to build brand awareness through marketing initiatives.

Innovation is a common theme across the board, as Wilson declared that 8% of 2014 sales (across both businesses) came from products launched in the last three years. Indeed, the industrial segment generated "much of its growth in 2014" from innovations in seasoning of chips, snack bars and crackers.

The bottom line
Putting all of this together, McCormick is a company that generated 3% local currency sales growth in 2014, but expects to grow local currency sales by 4%-6% in 2015. Moreover, much of its growth in 2014 came from innovation and investments in brands, while competitive pressures built up in its key U.S. consumer business, and end-demand weakened in parts of its industrial business.

Time will tell if McCormick hits its targets in 2015, and the success of its ongoing innovation programs will dictate matters to a large extent.

The article McCormick & Company (MKC) Earnings: Sales Growth Predicted for 2015 originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends McCormick. The author feels he deserves a commendation for not using any trite phrases like 'spicy results', 'tasty earnings', 'serves up', 'seasoned investors' (although the latter might go down well with cannibal readers), 'dishes out' etc etc.
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