McCormick & Co. Inc. MKC delivered better-than-expected earnings and revenues in the first quarter of fiscal 2015, despite difficult retail and competitive conditions in many markets.
Adjusted earnings of 70 cents per share beat the Zacks Consensus Estimate of 64 cents by 9.4%. Earnings also increased 13% from the 62 cents per share earned a year ago. The increase was driven by top-line growth, higher income from unconsolidated operations and a lower tax rate.
Revenues and Profits
The global leader in flavors and spices delivered first-quarter revenues of $1.01 billion, which grew about 2% year over year. Excluding currency headwinds, revenues grew 6%, driven by strong increases in both business segments. Sales also beat the Zacks Consensus Estimate of $986 million by 2.5%.
Despite a positive sales environment, the company’s operating income was affected by unfavorable currency rates and higher material costs. Excluding special charges, adjusted operating income declined 2.4% to $122 million in the first quarter.
However, on a constant currency basis, adjusted operating income grew 1% from the year-ago period, driven by sales growth and cost savings, offset in part by the unfavorable impact of higher material input costs and increased retirement benefit expense.
The company expects a more favorable operating income scenario over the near term, owing to pricing actions and increase in cost savings.
Segment Details
Consumer Business: Segment revenues increased 5% on a constant currency basis, driven by increased volume and a better product mix courtesy of product innovation, brand marketing support and expanded distribution. Sales increased on a constant currency basis in all the regions of Americas, Europe, Middle East and Africa (EMEA) and the Asia/Pacific.
Adjusted operating income of the segment was $91.5 million, slightly lower than the prior-year quarter, with the benefit of sales growth and cost savings not being able to offset the unfavorable impact of higher material costs, increased retirement benefit expense and product mix.
Industrial Business: Segment revenues increased 7% year over year on a constant currency basis in the first quarter, driven by higher volume and product mix, as well as pricing actions. Higher segmental sales were contributed by the all the three regions of EMEA, Americas and the Asia/Pacific.
Adjusted operating income of this segment was almost flat at $31 million, as the benefit of higher sales and cost savings more than offset the unfavorable impact of higher material costs and increased retirement benefit expense.
2015 Guidance
McCormick has lowered its earnings guidance for 2015, possibly due to apprehensions of higher material costs. Adjusted earnings are now expected in the range of $3.44–$3.51 per share, lower than the previous guidance of $3.51–$3.58, provided during the fourth-quarter 2014 conference call. The new adjusted earnings range is however higher than $3.37 per share reported in 2014.
The company continues to expect sales to increase 4% to 6% in local currency. Adjusted operating income is expected to grow 6% to 7% in constant currency from $608 million in 2014.
McCormick's Comprehensive Continuous Improvement program is expected to contribute at least $65 million, and savings from the announced streamlining and reorganization actions are estimated at $20 million for 2015.
Zacks Rank
Currently, McCormick has a Zacks Rank #3 (Hold). Some better-ranked stocks in the consumer staples sector are Monster Beverage Corp. MNST, Supervalu Inc. SVU and Flower Foods, Inc. FLO. While Monster Beverage sports a Zacks Rank #1 (Strong Buy), Supervalu and Flower Foods hold a Zacks Rank #2 (Buy).
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