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What’s Behind McCormick’s Improved Margin Performance?

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Updated

Adjusted operating margin expanded

McCormick (MKC) impressed with its improved performance on the margin front in the first quarter of fiscal 2019. McCormick’s gross margin stayed flat at 37.9% despite promotional activities and higher input costs, which was encouraging. Sales leverage and cost savings supported the company’s margins. Meanwhile, its adjusted operating margin expanded 40 basis points to 16.2%, reflecting cost-saving efforts and lower brand marketing investments. However, the company’s adjusted SG&A expense rate increased 40 basis points and remained a drag.

McCormick’s margin performance reflects a healthy recovery from its last-reported quarter. During the fourth quarter of fiscal 2019, McCormick’s gross margin contracted 30 basis points. Meanwhile, its adjusted operating margin contracted 70 basis points.

General Mills (GIS) also impressed with its stellar performance on the margin front. The packaged food maker’s adjusted gross margin expanded 170 basis points, while its operating margin expanded 230 basis points thanks to higher pricing, cost-saving initiatives, and acquisition benefits.

Meanwhile, Conagra Brands’ (CAG) adjusted operating margin expanded 130 basis points during the last reported quarter driven by higher pricing and cost savings. Improved pricing and mix supported the J.M. Smucker Company’s (SJM) gross margin during its last-reported quarter.

The profit margins of food manufacturers are taking a hit from continued inflation in raw and packaging materials costs. Promotional spending, weakness in their base businesses, and higher logistics cost are further suppressing their margins.

Outlook

McCormick’s management expects its adjusted operating income to mark 7%–9% growth in fiscal 2019. Its sales leverage and cost-saving initiatives are expected to support its operating profit. Moreover, the price-restructuring initiatives the company has undertaken to offset the negative impact of higher input costs are expected to support its margins.

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