McCormick Rides Portfolio Additions to Record Sales

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McCormick & Company (NYSE: MKC) has so far bucked the negative trend sweeping many companies in the consumer foods industry. Its dominant position in the growing spices and flavorings niche is allowing it to raise prices while peers struggle to pass along higher food costs. The bigger impact on McCormick's recent results has been its $4 billion acquisition of the French's and Frank's portfolio, which supercharged sales growth and lifted profitability to new highs last quarter.

The spice giant extended that positive momentum in the third quarter to stay right on track to meet management's full-year sales and profit targets.

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Broad gains led by acquisitions

There weren't any surprises in McCormick's big-picture trends, and that's good news for the business. Sales expanded moderately in its core portfolio of spices and flavorings while its acquired brands kicked in bigger growth. Profitability continued to rise due to cost cuts, higher prices, and a shift toward higher-margin condiment sales.

The key highlights of the quarter:

  • Sales rose 14% to keep right on pace with recent quarters. The acquired brands of French's and Frank's were worth about 10 percentage points of that increase while McCormick's core brands contributed the remainder.
  • Sales growth sped up in the key U.S. market thanks to a significant marketing and advertising push.
  • Gross profit margin rose by 2.8 percentage points to 44.2% of sales after accounting for temporary charges. That increase reflected rising prices, cost cuts, and a higher proportion of sales of ketchup and hot sauce condiments.
  • Adjusted operating profit improved to $242 million, or 18% of sales, from $204 million, or 17.2% of sales, a year ago. This profitability gain came despite higher marketing spending and increase commodity costs.
  • McCormick's 53% earnings spike was powered by favorable tax law changes, which management believes will lift earnings slightly higher this year than originally anticipated.

Management's comments

CEO Lawrence Kurzius and his team said the results met their aggressive targets. "Both our consumer and flavor solutions segments contributed to our constant currency sales growth of 14%," Kurzius said in a press release, with "growth in both segments ... led by incremental sales from the Frank's and French's portfolio." Executives highlighted effective marketing moves that resulted in higher sales volume in the key U.S. geography.

They also noted that the integration of the new franchises is going to plan. "We celebrated our one year anniversary of the Frank's and French's brands joining our portfolio and have achieved our year one acquisition plan for both sales and profit," Kurzius said.

Looking forward

McCormick tinkered with its sales growth outlook by shifting it lower by 1 percentage point to between 12% and 14%. The move was solely due to exchange rate changes, though, and so its core revenue forecast didn't change. Operating income is still expected to rise at a faster pace of around 22%, and that target also dipped slightly due to currency exchange moves.

McCormick lifted its adjusted earnings guidance to a range of between $4.95 per share and $5 per share, up from $4.85 per share and $4.95 per share, thanks mainly to favorable tax changes. Overall, these updates keep the spice giant on pace with what investors have been expecting.

Strong sales growth, rising profitability, and healthy cash flow should all combine to provide plenty of funds that the company can direct toward growth initiatives and dividends. And once it pays down the debt taken on for the condiment acquisitions, McCormick plans to add back stock repurchases as a significant capital return channel.

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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.