McCormick & Company (NYSE: MKC) is due to announce its fiscal third-quarter results before the market opens on Thursday, Sept. 28. Here are a few key trends investors should be watching in the report.
1. Core spice demand
Spices and flavorings have been a bright spot in grocery store aisles lately. While consumers, particularly in the younger demographic, are moving away from many of the staple food products located in the center of the store, demand for spices is holding up far better. Investors will be looking for that trend to continue.
McCormick sales rose by a healthy 7% last quarter, compared to a 4% drop at J.M. Smucker and the 1% decline at Campbell Soup. The spice giant's shares have dramatically outperformed these peers over the past year, but continued market-beating sales gains will be necessary to keep that momentum going. Its niche is projected to grow at a roughly 5% pace over the next few years, and as the industry leader, McCormick should expect to modestly exceed that result. Specifically, consensus estimates are calling for an 8% revenue boost this quarter to $1.18 billion.
2. New product introductions
Core brands include powerhouse global franchises like Old Bay seasoning and the McCormick line of spices and flavorings. While the company relies on these traditional brands for much of its sales base, a big portion of its growth will come from new product introductions.
At an investor presentation in early September, the management team previewed a few of the launches they believe might drive sales gains over the second half of this fiscal year. They highlighted a breakfast platform that includes smoothie boost packets, a new line of liquid gravy, and specialty flavoring extracts like almond and lemon. If McCormick outperforms its growth forecast this week, as it did last quarter, executives will likely credit these innovations for delivering market share gains.
3. About those acquisitions
Management will have plenty to say this week about the $4 billion acquisition it just closed for French ketchup and mustard, along with Frank's hot sauce and Cattlemen's barbeque sauce brands. Before beginning the integration process, the company said it believed the purchase would open up major growth avenues, both on the top and bottom lines.
To pay that premium sales price, though, McCormick is taking on lots of new debt. That means management will need to prioritize repaying those loans over direct cash returns to shareholders. The company said it aims to keep its dividend policy in place but will cut back its stock repurchases in a bid to free up extra cash.
We'll get a good indication of whether the acquisition is set to quickly begin paying off for the business in the updated growth forecast that management issues this week. Its prior target called for sales gains of between 5% and 7% this year, while operating income expands between 8% and 10%. Those projections are ahead of McCormick's long-term objectives that project revenue rising by roughly 5% each year as operating income grows by 8%. However, the company promised to update its forecasts as part of this week's earnings results to account for the significant impact of the new condiment business.
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