McCormick Stock always looks tasty

Investors have good reason to be happy McCormickit’s (M.C.C. 2.12% ) fiscal first quarter earnings report covering the sales period through the end of February. A key concern ahead of the announcement was that demand trends were slowing in its consumer sales division as more people returned to restaurants. Inflation also forces the packaged food specialist to be creative in raising prices and cutting costs.

But McCormick overcame those challenges to post faster revenue gains from the prior quarter. And management expects the company to still meet its sales and profit targets in 2022 despite inflation and supply chain challenges.

Let’s dive into it.

Spicy Sales Trends

McCormick was able to accelerate growth from the previous quarter, when sales were up 18% on a two-year basis. Revenue rose 4% this quarter, which may not seem like much compared to the 13% increase in the fourth quarter. But this recent growth comes on top of a 20% peak a year earlier.

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The gains were directed towards the restaurant division, which rose 14% after taking into account exchange rate fluctuations. The consumer segment, on the other hand, declined by 2%, due to slightly lower demand for flavors for home cooking compared to previous phases of the pandemic.

The performance met expectations and reflects a business that is growing faster than it was before the pandemic hit. CEO Lawrence Kurzius said in a press release that the results “demonstrate[e] our broad and advantageous global flavor portfolio as well as the efficient execution of our pricing actions.”

Raise prices

The company has seen the pressure of soaring costs on inputs, wages and transportation. Gross profit margin fell nearly 3 percentage points, in fact, to 37% of sales. Operating profit fell from $236 million to $207 million despite expanding the sales base.

McCormick takes a deliberate approach with its price increases so as not to open the door to competition. But management reiterated its prediction that these increases will eventually cover all the additional costs that are piling up in manufacturing and supply chains today. “We … expect to fully offset cost pressures over time using pricing and other levers as we have done in the past,” Kurzius said.

Look forward

The best news in the report is McCormick’s latest outlook and how little has changed since it was first published in late January. Executives still see strong demand for eating at home helping push sales up about 5% this year after last year’s 11% rise.

And while many of his peers have cut their earnings forecasts, McCormick is doubling down on his outlook. Operating profit will increase 8-10% after adjusting for currency fluctuations, meaning the company will likely see increased margins in 2022.

Combined with the prospect of solid growth after last year’s peak, this earnings news is a great sign for shareholders. McCormick is expanding its global operations in consumer and foodservice divisions, its recent hot sauce acquisitions are boosting sales and earnings, and its price increases are tracking inflation. Shareholders should be thrilled with these gains, which is why McCormick is such an attractive food stock to have in your portfolio.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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