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Why McCormick’s Margins Could Expand in 1Q18

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Improved sales and cost savings to drive margins

McCormick (MKC) has managed to grow its margins despite cost pressure stemming from inflation in input product costs and higher freight owing to the constrained carrier capacity. The company’s strong sales, cost-saving measures, and price restructuring initiatives have helped the company to offset the margin headwinds.

During the last reported quarter, McCormick’s adjusted gross margin grew 180 basis points, driven by improved volumes and mix coupled with higher pricing. Plus, cost savings from its CCI program further supported the margin expansion. McCormick’s adjusted operating margin increased 220 basis points in fiscal 4Q17, benefitting from higher gross margins. Also, a lower SG&A rate boosted the operating margin growth.

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Upbeat outlook

McCormick projects its adjusted gross margin to register a YoY (year-over-year) growth of 150 to 200 basis points in fiscal 2018, driven by higher volumes, increased pricing, and cost savings. Meanwhile, its adjusted operating profit is anticipated to see 23.0% to 25.0% growth in fiscal 2018. McCormick expects higher sales, favorable currency rates, and increased cost savings to boost its operating profit in fiscal 2018. However, inflation in commodity prices and investments in brand marketing are expected to remain a drag.

Packaged food manufacturers in the US have been struggling on the margins front. Companies like General Mills (GIS), Hershey (HSY), Campbell Soup (CPB), J.M. Smucker (SJM), and Kellogg (K) are expected to report muted margins growth, reflecting soft sales and increased manufacturing and transportation costs.

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