Advertisement

McCormick shares tumble after disappointing fourth-quarter earnings

Shares of McCormick & Co. Inc. tumbled more than 10 percent Thursday after the Hunt Valley spice maker missed profit estimates and said sales growth slowed in the fourth quarter.

A record year for McCormick ended on a weaker note mostly because of inventory problems at several retailers, which in some cases left higher profit margin items out of stock around the Thanksgiving holiday, a key selling time for the flavorings maker. Currency fluctuations also hurt profits.

Advertisement

“It was a disappointing quarter, in our view,” Brittany Weissman, a consumer analyst with Edward Jones, wrote in a report Thursday. “While growth was solid, McCormick's premium valuation had investors expecting a stronger quarter and outlook for 2019. This will likely cause shares to trade lower today.”

McCormick’s shares fell $14.52 each to close at $124.35 a share in Thursday trading.

CFRA Research lowered its stock rating on McCormick to hold from buy and lowered its target price by $37 to $130 per share.

“We still like [McCormick’s] strong and durable brand, but with growth expectations lowered, we do not see shares as attractive at this valuation,” Chris Kuiper, CRFA analyst, wrote in a report.

Despite the one-time issues that McCormick is still addressing, management said the outlook remains bright for the company, and the flavorings and spice category overall, as consumers look for healthy cooking and eating options.

“We delivered another year of record results in 2018,” marked by strong organic growth and the strongest consumption trends among consumers in years, said Lawrence E. Kurzius, McCormick’s chairman, president and CEO, during a conference call with analysts.

The company’s “flavor solutions” business, which supplies commercial customers such as restaurants, was solid in every global region, he said.

McCormick’s profit for the three months that ended Nov. 30 increased to $214 million, or $1.60 per share, compared with $175 million, or $1.32 per share.

On an adjusted basis, earnings rose 8 percent to $1.67 per share. Analysts were expecting a more than 10 percent jump in adjusted earnings to $1.70 per share.

Sales rose less than 1 percent to $1.499 billion, compared with $1.49 billion in the last quarter of 2017, McCormick said. Sales rose in the Asia Pacific region but were flat in the U.S. and Europe.

McCormick completed its acquisition a year ago of the Frank’s and French’s brands, which Kurzius said had their best performance yet under the McCormick umbrella in the fourth quarter.

Inventory problems arose when a handful of key customers reduced their overall inventory levels.

“It was odd timing for them to do this for our category, but it may have made sense for them across the broader stores,” Kurzius told analysts, saying the move would likely affect McCormick’s competitors too.

Another issue arose when a large customer, which Kurzius did not identify, changed its internal store replenishment system in error and stores and warehouses were unable to recognize order numbers.

Advertisement

“Consumer sales were negatively impacted by a large U.S. retailer unexpectedly changing its ordering system, which led to the retailer holding less inventory, and McCormick shipping fewer holiday products to the retailer,” Weissman said in her report. “The lower shipments drove some holiday products to be out of stock in stores. These holiday products have much higher profit margins, so this also weighed on company profits.”

McCormick’s consumer and commercial businesses both faced higher transportation costs and increased investments in brand marketing and new IT systems, which squeezed profit margins, she said.

McCormick said it expects the current year's sales to grow between 1 percent and 3 percent. Earnings for the year are projected to be between $5.09 to $5.19 per share, compared with $7 per share in 2018, which included the favorable impact of the federal tax legislation.

Weissman said the spice and seasonings category is expected to show solid long-term growth and McCormick’s earnings growth should benefit from the integration of the Frank’s and French’s brands.

“In all, McCormick continues to see above-peer growth,” Weissman said. “That said, expectations for McCormick are high, and the company faced some headwinds this quarter that are likely to weigh on shares.”

Advertisement
Advertisement