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Will McCormick’s Margins Continue to Expand?

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McCormick’s margins 

Recently, McCormick’s (MKC) margins have been impressive. The company’s margins have expanded at a healthy rate in the past three quarters despite facing headwinds from higher distribution costs. During the last reported quarter, McCormick’s gross margin expanded by 340 basis points, while the operating margins improved by 330 basis points. Higher volumes, increased pricing, improved mix, and cost-saving measures more than offset the negatives stemming from cost inflation.

In comparison, other food companies like J.M. Smucker (SJM), General Mills (GIS), Campbell Soup (CPB), and Hershey (HSY) continue to report lower margins. Weak organic sales, inflation in input costs, and higher supply-chain costs are taking a toll on the companies’ profitability.

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Outlook

McCormick’s management raised prices to offset the impact of cost headwinds. Management expects to realize the full benefit of the pricing action taken in the second half of 2018. McCormick’s profit margins will likely gain from higher net price realization. Volume growth led by new products should also support the company’s margins.

McCormick’s portfolio shifting towards high-margin products is an encouraging move. The shift resulted in an improved mix. Meanwhile, benefits from acquisitions and cost savings through McCormick’s CCI program are expected to cushion its profit margins. However, cost inflation and brand marketing spend will likely remain a drag.

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