McCormick Stock Q2: EPS Beat on Rising Margins, Falling Sales

Key Points

• McCormick beat earnings per share (EPS) estimates by 10 cents and increased EPS by 9 cents from the previous year.
• The company saw solid increases in margins while slightly lower sales.
• The company's net income margin is attractive compared to its sector's and could benefit from rebounding grocery store sales growth.

McCormick & Company NYSE: MKC is in the consumer staples sector and is the 8th largest US food products company by market capitalization. The firm reported Q2 2024 earnings on Jun. 27, 2024. The firm beat earnings per share (EPS) estimates by 10 cents, equating to an earnings surprise of 17%.

The share price surged 4.3% the day after the release. Now, investors have seen a modest return on the year of 2.8%. Let’s get a broad overview of McCormick’s business and segments, dive deeper into its earnings report, and get an outlook on the firm.

Understanding McCormick's Consumer and Flavor Solutions Segments

McCormick has two segments: consumer and flavor solutions. The consumer segment sells spices, seasonings, condiments, and sauces in retail stores. The firm's well-known brands include McCormick, Frank’s RedHot, Lawry’s, and OLD BAY. These products make up two-thirds of the segment sales, with the rest being through boxed and frozen prepared foods. This segment made up 57% of net sales in 2023.

The flavor solutions segment provides customized flavor solutions to multinational food manufacturers and food service customers. This includes seasoning blends, herbs, spices, and condiments. It also allows customers to benefit from its culinary research and food safety expertise. This segment comprised 43% of the firm’s net sales in 2023. Based on data for the quarter, the consumer segment has a higher operating income margin of 17% versus 12% for the flavor segment.

Seasonality affects the firm, typically resulting in higher profits in the 4th quarter. Some of the firm's competitors include Kraft Heinz NASDAQ: KHC and Conagra Brands NYSE: CAG.

McCormick's Quarterly Results: Increased Earnings Despite Sales Decline

Sales for the quarter were down 1% from the previous year. This was a result of lower volume from its flavor solutions segment. The press release said this decline was partially due to a divestment from a small canning business. This decline in the flavor segment more than offset the growth in the consumer segment. However, the firm grew its margins, increasing its gross profit margin by 61 basis points and Net Income Margin by 104 basis points. The company attributes this margin expansion to the success of its Comprehensive Continuous Improvement (CCI) program.

Another notable improvement was a 1.5% increase in Return on Equity. Cash from operations dropped to $163 million from $291 million. The main reason was a $27 million net inventory increase. Last year, there was a $72 million decrease in the same period.

The company attributes its ability to increase EPS from the prior period by 9 cents to its increasing margins, $20 million in net tax benefits, and strong performance from its joint venture, McCormick de Mexico. It is on course to achieve mid-teens profit growth on the joint venture in 2024. The company also declared its quarterly dividend of 42 cents per share. It has a dividend yield of 2.4%.

McCormick's 2024 Outlook: Guidance, Retail Sales, and Analyst Ratings

The firm expects sales growth to remain flat in 2024 on a constant currency basis. It will shed low-profit business segments to boost margins, causing volume to drop. It plans for high single-digit growth in brand marketing investments. Overall, it expects adjusted EPS growth of 6%.

Compared to its sector, the firm’s forward price-to-earnings ratio is on the mid-to-high end at 24.5. However, its trailing price-to-book and price-to-free cash flow numbers are almost at the bottom of their 10-year averages. These come in at 3.6 and 21.9, respectively. Its net income margin is in the 80th percentile compared to the sector while only in the 56th percentile compared to the firm's historical average. This shows the firm could reach even more impressive sector relative margin levels if it can get margins back to historical highs.

From an economic standpoint, grocery store sales growth is rebounding from historic lows not seen since the pandemic. Since October 2021, yearly growth in grocery sales has been steadily declining, bottoming at -0.3% in February 2024. Based on advanced retail sales data, the number hit 1.6% in May. Most analysts rate McCormick a hold, with an average price target of $76, implying a 9% upside.