Spice and seasoning manufacturer McCormick (MKC 99.56, -1.80) trades about 1.8% lower today in reaction to the company’s mixed Q1 report and reaffirmed guidance.
MKC reported better than expected Q1 earnings per share (EPS) of $0.76 on revenues which rose 1.3% to about $1.04 billion including a 2% unfavorable impact from currency.
Sales in the Consumer segment grew by 1%, including a 1% unfavorable impact from currency driven by the incremental impact of the acquisitions of Gourmet Garden and Cajun Injector, acquired in April 2016 and September 2016, respectively, as well as strong sales performance in China. Further, in the U.S. growth in the broader food industry was impacted by weak trends this period in many center-of-the-store categories. MKC attributed a portion of this weakness, related to its own products, to the impact of timing, including the effect of a late Easter in 2017.
MKC’s Industrial segment sales were up about 2%, including a 4% unfavorable impact from currency. This was led by double-digit increases in sales of both branded foodservice items and savory flavor products, offset in part by weaker demand from quick service restaurants. Industrial sales growth was driven by increased sales in both the Americas and Asia/Pacific regions, as well as the incremental impact of the acquisition of Giotti in December 2016.
Looking ahead, MKC continues to see FY17 EPS of $4.05-4.13 on revenue growth of 3-5% to about $4.54-4.63 billion. For Q2, the company expects EPS to be down slightly from EPS of $0.73 in last year’s Q2, due in part to a projected increase in the impact of special charges. Other factors affecting Q2 EPS include a higher tax rate, both the translation and transaction impact of unfavorable currency exchange rates, and a planned increase in brand marketing. Excluding the impact of special charges, adjusted Q2 EPS is expected to be comparable to adjusted EPS of $0.75 in last year’s Q2.
A bit more qualitative, MKC expects to drive sales with brand marketing, new products, expanded distribution and the incremental sales impact of acquisitions completed in fiscal year 2016 and from Giotti, acquired in December 2016. Sales are also expected to be driven by pricing actions that are intended to offset an anticipated mid-single digit increase in material costs. MKC has plans to achieve about $100 million of cost savings and intends to use these savings to improve margins, fund a high-single digit increase in brand marketing, and as a further offset to increased material costs.
It appears that investors are not happy about the Q2 expectations and the reaffirmed guidance. Sales were higher in Q1, albeit at a moderate pace, but shareholders seem to be overlooking that for now as the stock pares mid-morning losses but still trades firmly in the red.