McCormick & Company, Incorporated ( MKC Quick Quote MKC - Free Report) released preliminary results for the third quarter of fiscal 2022. The company also lowered its guidance for fiscal 2022, considering the preliminary results, earlier-than-anticipated moderation of consumption trends, sluggish normalization of supply-chain cost, the impacts from the Kitchen Basics business divestiture (concluded during the third quarter) and increased currency headwinds. Q3 Trends
McCormick stated that third-quarter sales lagged management’s expectations. While results were fueled by continued strength in the Flavor Solutions segment, the Consumer segment's growth was hampered by the divestiture of Kitchen Basics business and earlier-than-expected moderation of increased consumption trends. Apart from this, inflation-led pressure on consumers’ cost of living has led to greater-than-expected price elasticity.
Management’s updated outlook considers increased brand investments. These investments, together with focus on innovation and category management efforts should aid growth. Also, the company stated that at-home cooking remains higher than pre-pandemic levels, which gives out positive signals for at-home consumption. McCormick continued to encounter supply-chain hurdles during the third quarter, with supply recovery for some restricted materials taking a longer-than-anticipated time. Additionally, the company continued to incur increased costs to cater to high demand in certain parts of the business, alongside witnessed reduced operating leverage in other parts where demand has moderated. All said, escalated supply-chain costs are putting pressure on the company’s gross margin. Image Source: Zacks Investment Research Preliminary Q3 Numbers
Third quarter sales are likely to advance about 3% year over year, including expected currency headwinds of about 3%. Sales growth is anticipated to be fueled by pricing, somewhat negated by lower volume and product mix – which includes impacts from the Kitchen Basics divestiture.
Management expects adjusted operating income to be roughly $226 million, compared with the year-ago period’s figure of $272 million. The downside can be attributable to soft gross margin, especially in the Flavor Solutions unit. Escalated brand marketing investments are also likely to lead to the decline. Owing to a decline in adjusted operating income, adjusted earnings per share is envisioned to be nearly 65 cents in the third quarter, down from 80 cents reported in the year-ago period. Fiscal 2022 Guidance
Management now anticipates currency headwinds to hurt fiscal 2022 net sales by 3% compared with the previous view of 2%. Adjusted operating income and adjusted earnings per share (EPS) are still likely to bear a 2% negative impact from currency movements.
For fiscal 2022, net sales are expected to increase 2% from fiscal 2021, and rise 3-5% at constant currency or cc. This includes an adverse impact from the sale of the company’s Kitchen Basics business. Earlier, McCormick projected net sales growth of 3-5% (5-7% at cc). Adjusted gross margin for the fiscal is estimated to contract 350-300 basis points year over year, mainly owing to the Flavor Solutions segment. Management still expects cost inflation in high teens range. Adjusted operating income is likely to decrease 13-11% (down 11-9% at cc). Earlier, the metric was likely to rise 2% (2-4% at cc). The revised guidance reflects sales and gross margin views and increased brand marketing investments, partly compensated by cost saving expectations of about $85 million from the Comprehensive Continuous Improvement (CCI) program. Finally, the Zacks Rank #4 (Sell) company envisions adjusted earnings per share of $2.63-$2.68, compared with the prior view of $3.03-$3.08. The company posted adjusted earnings of $3.05 per share in fiscal 2021. The reduced guidance reflects the revised adjusted operating income view and an adverse impact of about 2 cents from the sale of the Kitchen Basics business. Shares of the company have declined 2.7% in the past three months, against the industry’s rise of 1%. Food Stocks Worth a Look
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