McCormick reassures doubters about optimistic outlook for ’22 despite slow start, broad headwinds

By Elizabeth Crawford

- Last updated on GMT

Source: Getty/SolStock
Source: Getty/SolStock

Related tags spices Herb McCormick & Company

While flavor and spice giant McCormick & Company plans to raise prices again in the coming quarters to offset inflation and broad-based supply chain issues, executives warn their benefit to the company’s bottom line will be delayed – temporarily squeezing margins and profits as higher cost are in play already.

Despite a potentially rough start to 2022, company leaders reassured investment analysts that the company is “well-positioned for another strong year of growth”​ with projected topline growth of 4-6% or 5-7% in constant currency and an increase in anticipated earnings per share in the range of $3.17 to $3.22 compared to $3.05 for 2021. They also anticipate an adjusted gross margin “comparable”​ to the 160 basis-point drop in 2021 to 50 basis-points lower – reflecting tough comparables during pandemic buying.

However, much of the upside and profit growth will be weighted to the second half of the year, CFO Mike Smith explained during the company’s fourth quarter earnings call Jan. 27 – a qualifier that didn’t sit well with some analysts on the call given the company’s ambitious predictions.

“In light of all the difficult dynamics that are playing out in 1Q,”​ including rising costs estimated by McCormick in the mid-teens, Andrew Lazar of Barclays asked company executives for “a little more detail”​ on how they plan to achieve their topline guidance – noting some “investors are trying to get a better handle on sort of the achievability of the full year.”

Indeed, Wall Street projections for McCormick’s growth in 2022 currently hover around 2%.

Dismissing the projection gap as “a bit pessimistic,”​ CEO Lawrence Kurzius said that he has a “pretty upbeat view of where our sales our going”​ given underlying consumer trends – including cooking at home more and consumers becoming more confident in the kitchen – support McCormick’s growth.

“The demand for flavor is not cyclical or obsolete or pandemic related, but it’s under girded by real demographics with older generations, fueling that demand and we think the consumption,”​ he said, adding, “the shift in consumption at-home that has happened in recent years is just a continuation of a long-term trend that supports our business from an underlying stand point and all the things that we do in our strategies for brand building and so on continue to be supportive of growth.”

A longer-term view of the full-year and not just the first quarter underway also suggests a potential “significant impact on the topline from pricing,”​ which will go into effect in the second quarter and benefit the company in the second half of the year, he said.

In addition to the pricing lag, CFO Mike Smith highlighted that McCormick’s first month is historically its smallest and the fourth the largest. He also noted that comparing the first quarter of 2022 to 2021 is “tough” because at the start of last year inflation was in the low single-digits and is now in the mid-single teens.

Volume likely will remain strong, executives predict

While the price increase may help reinforce dollar sales, Lazar also wondered about their potential impact on unit sales and the extent to which consumers, who are facing rising prices across the board, could absorb additional price increases.

Again, Kurzius was optimistic that additional price increases would have little impact on volume as it did in the first round that went into effect last year. However, he acknowledged the fast follow on of increases could have a “cumulative effect,”​ which is why the company modeled in elasticity – just “not at the rates we have seen historically.”

He explained that “we’re in new and uncharted territory versus all of the elasticity models, at least from the actions we’ve taken so far. We assumed lower price elasticity and that what we seem to be experiencing, if anything, we may be seeing slightly even less elasticity than we’ve assumed.”

With that in mind, he said he would characterize volume impact at a total company level to be “more flattish to low single-digit decline”​ rather than the mid-single digit decline that Lazar suggested.

A strong track record

The company’s strong track record and better-than-expected performance in 2021 also helped assuage some investment analysts’ doubts that McCormick might not hit its targets.

McCormick’s sales in the fourth quarter ending Nov. 30 climbed 11% to $1.73b compared to the same period the prior year – helping to bolster year over year sales 13%. Of this, the company’s consumer business sales rose 9.8% and its flavor solutions sales were up 13.6%.

Looking farther back, Kurzius pointed to the company’s performance during the last recession.

“I don’t know that we’re expecting a recession in 2022, but even in tough times that were more economically tough, our products have done very well, our products contribute pennies, a fraction of the cost of the meal and are actually part of the consumer’s way to manage their total inflation,”​ he said, explaining: “If meat is going up 40%, one way you can stretch your grocery dollar is to buy less expensive cuts and use more spices and our recipes.”

With that he reiterated McCormick has a “demonstrated history of managing through short-term pressures … and we expect to do the same through this inflationary environment using pricing and other levers to fully offset cost pressures over time.”

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