McCormick & Co. saw its profit jump nearly 8 percent in the second quarter amid higher sales to consumers as well as to food manufacturers and restaurants, the Sparks-based spice maker said Thursday.
But higher-than-expected earnings, mostly driven by a lower-than-expected tax rate, masked the company's competitive struggles in the United States, as lower-priced rivals vie to crowd out the well-known brand on store shelves, one analyst said.
McCormick's shares slipped Thursday after results came in weaker than expected, closing down almost 1.3 percent at $70.27 each.
"They are losing share in the U.S. on the consumer side, with smaller players coming in the market and taking share from them," said Brian Yarbrough, a consumer analyst for Edward Jones in St. Louis.
The company earned $84.5 million, or 64 cents per share, in the three months that ended May 31, up from $78.6 million, or 59 cents per share, in last year's second quarter. The results beat analysts' expectations of 62 cents per share, but the company missed an anticipated 4 percent increase in revenue.
Overall sales rose 3 percent to $1.03 billion in the quarter, with growth especially strong in international markets. Sales growth at Wuhan Asia-Pacific Condiments, which McCormick acquired in May 2013, helped boost results, the company said.
"Demand for flavor is growing globally, and McCormick is meeting this demand with its range of products that include innovative new items, healthy recipe ideas, ethnic cuisine and family favorites," McCormick CEO Alan D. Wilson said in the announcement.
Since last year, McCormick has faced more intense competition for consumer business mainly in the U.S., where sales decreased 5 percent and the company has been taking steps to boost brand awareness.
Yarbrough applauded the company's nearly yearlong effort to combat the competition by working more closely with retailers, beefing up marketing and rolling out new products.
But "the volume declines in the Americas continue to be a little bit concerning," he said. "With the smaller players making inroads, it will be tougher than we thought and take more than a couple of quarters. I don't remember a period where they talked about a market share loss lasting this long."
During this fiscal year, the company plans to invest at least $25 million in increased marketing to help drive sales of both new and core products. The company also will introduce items this year such as new skillet sauces, gluten-free recipe mixes and premium herbs, Wilson said.
McCormick expects that that strategy to lead to improvements in the U.S. consumer business toward the end of this year, noting that improved sales of recipe mixes is one early sign of progress.
While industrial business sales rose 2 percent companywide, U.S. sales in that segment — to restaurants and food manufacturers — dipped 2 percent, reflecting weak demand from quick service restaurants, the company said.
Some slowdown in demand can be linked to quick service restaurants' new emphasis on breakfast menus and to a consumer shift to more natural and organic food, Yarbrough said.
"The trend toward more freshness … is coming at the expense of packaged food and quick service restaurants," he said.
The company said Thursday it continues to expect sales growth in fiscal 2014 of between 3 percent and 5 percent and to reach earnings per share of between $3.22 to $3.29. McCormick said its strong cash flow has allowed it to return $223 million to shareholders through dividends and share repurchases this year.
"We continue to adapt to a changing environment as we pursue global growth opportunities and address competitive challenges in certain markets," Wilson said.
In March, the spice and flavorings maker said it is seeking a new headquarters site where it could blend its administrative offices in a single location. McCormick is searching primarily in parts of Maryland and Pennsylvania near where employees live to have a minimal impact on commutes. It has described the relocation as a long-term, multiyear project.Copyright © 2015, The Baltimore Sun