McCormick & Company ( MKC Quick Quote MKC - Free Report) is grappling with escalated cost inflation, which has been marring its margin performance for a while. The global leader in flavor is battling supply chain-related issues. Recently, management lowered its fiscal 2022 view, considering third-quarter preliminary results, moderation of consumption trends, supply-chain costs, currency headwinds and impacts from a divestiture. Shares of the Zacks Rank #5 (Strong Sell) company have slumped 19.1% in the past six months against the industry’s 5.3% growth. Let’s discuss this further. Dismal Q3 Trends
McCormick recently stated that third-quarter 2022 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 the Kitchen Basics business and earlier-than-expected moderation of increased consumption trends.
Inflation-led pressure on consumers’ cost of living has led to greater-than-expected price elasticity. McCormick continued to encounter supply-chain hurdles during the quarter, with supply recovery for some restricted materials taking a longer-than-anticipated time. It continued to incur increased costs to cater to high demand in certain parts of the business. The company also 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 Lowered View
For fiscal 2022, net sales are expected to increase 2% from fiscal 2021 levels and rise 3-5% at constant currency (cc). This includes an adverse impact from selling the company’s Kitchen Basics business. Earlier, McCormick projected net sales growth of 3-5% (5-7% at cc).
The adjusted gross margin for the fiscal year is estimated to contract 350-300 basis points (bps) year over year, mainly due to the Flavor Solutions segment. Management still expects cost inflation in the high teens range. Adjusted operating income will likely decline 13-11% (down 11-9% at cc). The metric was projected 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. For fiscal 2022, management 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. Margin Pressure
McCormick has been grappling with cost inflation for a while now. During second-quarter fiscal 2022, the company’s gross profit margin contracted 550 basis points (bps) to 34%, thanks to increased material and transportation cost inflation and an adverse product mix. In the fiscal second quarter, the company’s operating income was $157 million, down from $237 million reported in the year-ago quarter. The downside was caused by gross margin contraction and increased distribution expenses.
McCormick is on track to capitalize on healthy and flavorful cooking, increased digital engagement and purpose-minded practices. It is well-placed to capitalize on the demand for great taste fueled by an impressive global flavor portfolio. The company regularly enhances products through innovation to remain competitive and tap the evolving demand. Management is on track with cost savings and enhancing productivity.
All said, let’s see if these upsides can help McCormick counter the aforementioned hurdles. Looking for Better-Ranked Food Bets? Check These Out.
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