McCormick & Co. Inc. MKC delivered upbeat results in the first quarter of fiscal 2016, possibly due to strong sales momentum in both the segments. The company also updated its guidance for 2016.
Adjusted earnings of 74 cents per share beat the Zacks Consensus Estimate of 69 cents by 7.2%. Earnings increased 5.7% from 70 cents per share earned a year ago, primarily driven by the impact of higher adjusted operating income offsetting currency headwind.
Revenues and Profits
The global leader in flavors and spices delivered first-quarter revenues of $1.030 billion, which narrowly beat the Zacks Consensus Estimate of $1.029 billion and grew about 2% from the prior-year quarter. Excluding currency headwinds, revenues grew 7%, driven by increased volume, gain from acquisition, higher pricing and improved product mix in the base business. Sales from acquisitions added 2% to sales growth.
The company’s adjusted operating income grew 7.4% to $131 million in the first quarter. On a constant currency basis, it increased 12%, owing to higher sales and cost savings more than offsetting material cost inflation and increased employee benefit expenses.
Segment Details
Consumer Business: Segment revenues grew 6% on a constant currency basis, driven by acquisition gains, increased volume, better product mix, brand marketing support and expanded distribution, as well as pricing actions. Sales increased on a constant currency basis in all the regions of Americas, Europe, Middle East and Africa (EMEA) and the Asia/Pacific, with particular strength in China.
On a constant currency basis, adjusted operating income rose 7% driven by favorable impact of sales growth and cost savings more than offsetting the unfavorable impact of higher material costs and employee benefits expense.
Industrial Business: Segment revenues increased 7% year over year on a constant currency basis in the first quarter, driven by Brand Aromatics acquisition benefit, higher volume, higher pricing and improved product mix. Sales increased on a constant currency basis in all the regions of Americas, Europe, Middle East and Africa (EMEA) and the Asia/Pacific.
On a constant currency basis, adjusted operating income increased in double digits year over year, as the favorable impact of higher sales and cost savings more than offset the unfavorable impact of increases in material costs and employee benefit expense.
Fiscal 2016 Guidance
The company now expects lower impact from currency headwinds in 2016.
The company anticipates fiscal year 2016 sales to grow in the range of 4% to 6% on a constant currency basis. Including the estimated impact of unfavorable currency rates, sales are projected to increase 1% to 3%.
The company expects 2016 adjusted operating income to grow in the range of 6% to 8%, up from 5% to 7% from adjusted operating income of $614 million in 2015. In constant currency, adjusted operating income is expected to grow 9% to 11%. The company expects its 2016 cost savings to be at least $95 million.
McCormick now projects 2016 adjusted earnings to be in the range of $3.68 to $3.75 per share, up from $3.65 to $3.72 per share expected previously, owing to lower impact from unfavorable currency. This marks an increase of 6% to 8% compared with $3.48 in 2015. On a constant currency basis, adjusted earnings are expected to grow in the range of 9% to 11%.
However, earnings per share in the second quarter of 2016 are expected to be slightly below the adjusted earnings per share of 75 cents in the second quarter of 2015. While the company anticipates strong sales growth and further improvement in gross profit margin, a portion of the additional brand marketing is planned in the second quarter along with increase in the tax rate. The Zacks Consensus Estimate for second quarter fiscal 2016 stands at 74 cents per share, lower than the prior-year quarter.
Our Take
McCormick has been witnessing rising demand for spices, herbs and seasonings over the last few years. Further, its focus on building sales through brand marketing investments and acquisitions has been driving its earnings. In 2015, the company acquired Austin, TX – based One World Foods, Inc., the seller of Stubb's barbeque sauces (Stubb's) in August, Drogheria & Alimentari (D&A) in May and Brand Aromatics in March. Further, McCormick has also been regularly launching new products in order to remain competitive. Its increasing focus on higher pricing and cost savings is also encouraging.
However, unfavorable currency and higher input costs remain headwinds.
Zacks Rank
Currently, McCormick has a Zacks Rank #3 (Hold). Better-ranked stocks in the space include Campbell Soup Company CPB, Post Holdings, Inc. POST and Sysco Corp. SYY. While Campbell Soup and Post Holdings hold a Zacks Rank #1 (Strong Buy), Sysco carries a Zacks Rank #2 (Buy).
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