McCormick falters as high costs, supply chain challenges and COVID restrictions impact sales, profits

By Elizabeth Crawford contact

- Last updated on GMT

Source: Getty/Image Source
Source: Getty/Image Source

Related tags: McCormick & Company, spices, Inflation, Supply chain

Dragged down by higher-than-expected cost inflation, supply chain challenges and unanticipated, stringent COVID-related restrictions in China, McCormick missed its sales and earnings targets in its second quarter – forcing the spice maker to slash its financial outlook.

The miss comes in sharp contrast to the company’s long-term, industry-leading performance during the pandemic so far in which it has seen strong growth and met or exceeded its financial targets.

To right the ship, executives told investment analysts yesterday during the company’s second quarter call that they would push through another round of price increases and continue to reduce discretionary spend and prune underperforming products where possible.

“We expect our pricing actions and other levers to begin to outpace cost pressures late in the third quarter, with higher cost and higher offsetting pricing actions than we expected on our last call, which further weights our 2022 profit in the second half of the year,”​ CEO Lawrence Kurzius said, adding, “We plan to fully offset cost pressures over time.”

His reassurances, however, were not enough to offset investor fears, which triggered a selloff that sent the company’s stock price plummeting from $88.23 per share Tuesday mid-morning to $83.30 per share 24 hours later after the quarterly results were revealed.

‘Unfavorable,’ ‘discrete items’ weighed down sales, margins

The 5.5% drop in share price reflects the 3.9% difference in net sales between the $1.6b Wall Street expected and the $1.54b McCormick reported, and the 35.42% difference between the company’s posted adjusted earnings of 48 cents a share in the second quarter and analysts’ expectations of 65 cents as tracked by FactSet.

Executives tried to soften the 1% drop in sales in Q2 from a year ago by explaining it would have been a 4% increase if not for a series of “unfavorable” and “discrete items,” including a 1% impact from a 75 day lockdown in China which forced the closure of its Shanghai plant for two weeks and ongoing labor challenges after reopening due to lockdown-related labor shortages.

“China is our second biggest sales country, with operations in Shanghai, Guangzhou and Wuhan. Our Shanghai operation produces approximately 40% of our total China sales,”​ which also fell due to decreased demand during the lockdown, Kurzius explained.

The drop in sales also was attributed to a 2% impact from lapping US trade inventory replenishment during last year’s second quarter, he added.

Challenges securing sufficient packaging also hindered the company’s ability to meet demand and further boost sales, as did higher than expected costs.

“To partially offset cost pressures, we’ve take multiple pricing actions and, as planned, we are raising prices again”​ with the intention to fully offset cost pressures overtime Kurzius said.

Balancing consumer needs with higher prices

He acknowledged that price increases are starting to take a toll on consumers, but he also stressed that most consumers remain strong and elasticities are holding.

“As we look ahead and our additional pricing actions are phased in, the elasticity we experience may change, but we still expect the impact to be lower than historical levels,”​ he said.

To reduce the risk of price-conscious consumers turning away from more expensive products, Kurzius said McCormick is pivoting its messaging to emphasize how its products help shoppers stretch their grocery dollar.

“For example, we’re launching a digital messaging highlighting the value of our product by making a great flavorful meal economically. We add flavor for only pennies per serving and recipes like our 30-minute taco casserole are family and budget-friendly answers to what is for dinner,”​ he said.

It also is rolling out high value innovations, with product launches available at additional entry-level price point and larger sizes for better savings.

Lower outlook

As McCormick looks to manage rising costs and supply chain challenges going forward, it does so with a clearer understanding of the macro environment and adjusted its guidance for the full year accordingly.

“We have always expected our profit growth to be weighted in the second half of the year, we now expect it to be even more so,”​ said CFO Mike Smith.

He explained the company now expects sales growth of 5-7% for the year, driven primarily by pricing, a gross profit margin of 200 basis points to 150 basis points lower than 2021, and an adjusted operating income of 2-4% in constant currency.

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