McCormick Bounces Back

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Investors had concerns heading into McCormick's (NYSE: MKC) fiscal first-quarter earnings report after the spice and flavorings specialist announced a rare sales-growth slowdown in the prior selling period. Management said those softening results weren't a reflection of weaker demand but were instead tied to temporary inventory issues at a major retailing partner. Still, investors braced for the potential that sales trends would stay sluggish.

This week, McCormick put an end to that worry, as revenue gains accelerated and the profit picture improved. Let's look at how the spice-giant's business fared over the past few months.

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Sales gains

Revenue growth landed at 4% after accounting for currency swings, which returned McCormick to its prior expansion pace after gains slowed to 2% in the fiscal fourth quarter. That rebound suggests last-quarter's slowdown really was a temporary retailing speed bump, as management had predicted.

Looking deeper into the top-line gains, there were several reasons for shareholders to like this result. McCormick notched growth in both its consumer and flavor-solutions segments, expanded across each of its geographic regions, and achieved balanced growth in both sales volumes and average selling prices. CEO Lawrence Kurzius said in a press release the performance amounted to "a great start to the year reflecting the successful execution of our strategies."

Margins and outlook

Higher selling prices weren't the only thing helping push McCormick's earnings up this quarter. The company also benefited from a continuing shift in the sales mix toward the condiment and sauce franchises it recently acquired.

In fact, the French's and Frank's businesses helped keep gross profit margin at 38% of sales, despite rising input costs. McCormick paired that success with expense discipline, which translated into adjusted operating income of $199 million, or 16.2% of sales, compared to $192 million, or 15.8% of sales, a year ago. Operating profit growth was 6% after accounting for currency-exchange moves. "We delivered against our plans for both sales growth and profit realization," Kurzius summarized.

Executives affirmed all the key aspects of their full-year outlook. They still expect to boost organic sales by between 3% and 5% in 2019 to protect the growth momentum the company notched last year.

Costs are rising on many of its inputs, on labor, and on transportation. However, McCormick is planning to more than offset this spike through a mix of higher prices and over $100 million in cost cuts. Overall, adjusted operating income should grow by between 9% and 11% this year.

That should translate into adjusted earnings of about $4.97 per share, with the 5% gain on the bottom line trailing operating income growth due to tax payment volatility. McCormick plans to use most of its ample cash flow this year to reduce debt and pay out a steadily rising dividend. By fiscal 2020, assuming things track close to management's plans, the company should be in a financial position to resume its aggressive stock repurchases or make more game-changing acquisitions like the recent French's and Frank's buyouts.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.