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McCormick Crushed Its Fiscal 3Q17 Estimates, Stock Rose

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Part 5
McCormick Crushed Its Fiscal 3Q17 Estimates, Stock Rose PART 5 OF 7

Analyzing McCormick’s Fiscal 3Q17 Margins

Factors impacting the margins

McCormick (MKC) managed to improve its operating margins due to its strong sales. During fiscal 3Q17, the company’s margins benefited from increased sales, a favorable product mix, higher pricing, productivity savings, and cost reductions. However, increased input costs and higher brand marketing expenses remained a drag.

In comparison, J.M. Smucker (SJM) and General Mills’ (GIS) margins were impacted negatively by lower volumes and rising input costs.

Analyzing McCormick’s Fiscal 3Q17 Margins

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McCormick’s 3Q17 margins

McCormick’s fiscal 3Q17 gross margins fell by 70 basis points to 40.9%. Increased input costs more than offset the benefits of sales leverage. However, the company’s adjusted gross margin fell by 20 basis points, which reflected a negative mix.

Notably, the company’s adjusted operating margin rose by 140 basis points to 17.2%, which reflected higher sales, productivity savings, and lower SG&A (selling, general and administrative expenses) as a percentage of sales. During the reported quarter, the SG&A as a percentage of sales fell by 160 basis points due to lower employee-related costs.

As a result of higher cost savings, Kraft Heinz (KHC) and Kellogg (K) managed to expand their margins despite lower sales. However, Conagra’s (CAG) adjusted operating margin fell during fiscal 1Q18. Higher slotting investments and increased input costs remained a drag.

Outlook

McCormick’s management raised its gross margin outlook for fiscal 2017. The company expects gross margins to rise by 25–50 basis points, which is higher than its earlier expectation of a flat to 50 basis point improvement.

Management expects the adjusted operating margin to rise 20%–21% in fiscal 2017, which is higher than its earlier guidance of 8%–10% growth.

McCormick’s planned increase in brand marketing spends to support its new products and increased input costs will likely restrict its margin growth. However, the company expects to mitigate the negative impact through higher sales and a projected cost savings of $105 million—up from the earlier target of $100 million.

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