McCormick & Company (MKC): Sustained at-home food demand and foodservice recovery expected to drive growth

Shares of McCormick & Company (NYSE: MKC) were down 1.8% on Thursday despite the company reporting better-than-expected earnings results for the third quarter of 2021. The stock has dropped 14% thus far this year and 14% over the past 12 months.

Quarterly performance

In Q3 2021, net sales increased 8% year-over-year to $1.55 billion. Sales from the Cholula and FONA acquisitions contributed 4% to the top line growth. Sales in the Consumer segment grew 1% while Flavor Solutions segment sales rose 21% versus the year-ago quarter. Higher sales drove a 5% growth in adjusted EPS to $0.80. Both the top and bottom line numbers surpassed market expectations.

Trends

During the quarter, the company continued to see demand for at-home food consumption as customers chose to stick to their pattern of cooking more meals at home, a trend which had gained traction during the pandemic. McCormick expects this trend to continue beyond the pandemic as people prefer more home-cooked and healthy options and believes this will help drive sales growth going forward.

The company faced tough comparisons as the year-ago period included the pandemic-driven surge in demand. Its total US branded portfolio consumption declined 10% in Q3 compared to a 31% consumption increase in the same period in 2020.

Consumption growth was 19% compared to Q3 2019 and this was led by double-digit growth in spices and seasonings, hot sauces and barbecue sauce. Household penetration and repeat rates have grown versus 2019 and the company is seeing customers purchase more of its products than they were pre-pandemic.

McCormick is also seeing a recovery in the foodservice industry which helped drive sales in the Flavour Solutions segment. The company expects this recovery to continue over the coming months and believes this will help drive growth.

Like its peers, McCormick is facing cost pressures. In Q3, higher inflation and industry-wide logistics challenges took a toll on profit. The company plans on tackling inflation through pricing and other strategies.

Outlook

McCormick raised its sales guidance for fiscal year 2021 but pared its outlook for adjusted EPS. The company now expects sales to grow 12-13% versus FY2020. The earlier projection was for a growth of 11-13%. Adjusted EPS is now expected to range between $2.97-3.02 versus the previous outlook of $3.00-3.05. The decrease was driven by revisions to adjusted operating income that reflect higher inflation and logistics challenges.

Click here to read the full transcript of McCormick’s Q3 2021 earnings conference call