McCormick & Co. Inc.(MKC - Analyst Report) delivered better-than-expected earnings in the second quarter of fiscal 2014, but missed the revenue expectations by a slight margin.
Earnings of 64 cents per share beat the Zacks Consensus Estimate of 62 cents by 3.2% and increased 8% from the year-ago earnings of 59 cents per share. Top-line growth, cost saving initiative, higher operating income and lower tax rate contributed to earnings in the quarter. Lower shares outstanding owing to share buybacks also contributed to the bottom line.
Revenues and Profits
The global leader in flavors and spices delivered revenues of $1,033.4 million in the quarter, which grew 3% year over year. The acquisition of Wuhan Asia-Pacific Condiments Co. Ltd. (WAPC) (acquired in May 2013) contributed 3% to net sales growth.
Both the consumer and industrial business segments witnessed positive results in the quarter, aided by the company’s product innovation, brand building and distribution program. However, sales in the Americas region were soft due to increased competitive pressure in its consumer business. Sales slightly lagged the Zacks Consensus Estimate of $1047 million by 1.3%.
McCormick’s gross margin expanded 60 basis points to 39.9% in the quarter, owing to cost savings from McCormick's Comprehensive Continuous Improvement (CCI) program and the impact of industrial products, which carried higher margins. Operating income improved 5% to $122 million driven by top-line growth and improved gross margin.
Consumer Business: Segment revenues increased 4% to $615.0 million, mainly driven by the WAPC acquisition, which contributed 6% of the sales growth. Sales increased in the geographic regions of Europe, Middle East and Africa (EMEA) and Asia/Pacific.
Sales, however, declined 5% in the Americas, due to continued competitive pressure which started in 2013. Volume and product mix also declined in the quarter. McCormick is taking appropriate actions to address the competitive environment in this region. The company has increased the pace of innovation and increased brand marketing support in order to boost its consumer business. In fact, the company expects improved performance in the region toward the end of 2014. The company is also very optimistic about its consumer business, since it expanded its footprint in central China with acquired WAPC.
Operating income of the segment was $86 million, 2% lower than the prior-year quarter, due to unfavorable business mix and an increase in brand marketing expenses offsetting the favorable impact of higher sales and CCI cost savings.
Industrial Business: Segment revenues grew 2% year over year to $418.4 million in the second quarter of fiscal 2014. Sales increased 3% on a local currency basis owing to higher volumes, pricing and favorable product mix. In the industrial business, higher sales were led by the EMEA and Asia/Pacific regions. Americas witnessed a decline in the quarter due to the on-going weakness in demand from quick service restaurants.
Operating income of this segment shot up 26% in the quarter to $36 million. The upside was driven by higher sales and CCI cost savings.
Fiscal 2014 Guidance
McCormick reaffirmed its fiscal 2014 outlook. The company continues to expect sales to increase in the range of 3% to 5%, driven by higher volume, pricing and the incremental impact of the WAPC acquisition in the first half of the year. However, the company expects unfavorable foreign currency exchange rates to reduce sales by 1% in 2014. The company expects to achieve at least $45 million in CCI cost savings during 2014.
Based on this outlook for operating income growth, McCormick expects 2014 earnings in the range of $3.22 to $3.29 per share, an increase of 3% to 5% from adjusted earnings per share of $3.13 in 2013.
As per Euromonitor International, global retail sales of herbs, spices and recipe mixes will increase at a compound annual growth rate of 2% to 3% through 2016. The company expects to benefit from this growth through innovation, brand marketing and acquisitions. The company also expects to increase industrial sales through innovation and expanded distribution.
McCormick currently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the consumer staples sector include BRF S.A. (BRFS - Snapshot Report),The Hain Celestial Group, Inc. (HAIN - Analyst Report) and Inventure Foods Inc (SNAK - Snapshot Report). While BRF sports a Zacks Rank #1 (Strong Buy), Hain Celestial and Inventure Foods hold a Zacks Rank #2 (Buy).