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McCormick Had Impressive Margins in Q2

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Margins expanded

McCormick (MKC) continued to have impressive margins in the second quarter. After witnessing a sequential improvement in the first quarter, McCormick sustained the momentum in the second quarter and posted higher margins.

McCormick’s gross margin expanded by 30 basis points to 39.1% despite higher input costs and promotional spending, which is encouraging. Improved organic volumes, a favorable mix, and higher pricing supported the gross margins. Cost savings cushioned the gross margin rate.

McCormick’s adjusted operating profit margin expanded by 80 basis points to 16.5%, which reflected the higher gross margin and lower SG&A (selling, general, and administrative) expense rate. SG&A expenses, as a percentage of sales, fell by 50 basis points, which reflected lower brand marketing investments.

In comparison, packaged food companies’ profit margins are taking a hit due to higher input costs. General Mills’ adjusted gross and operating margin contracted by 50 basis points during the last reported quarter. Conagra Brands’ adjusted gross margin fell by 210 basis points, while the operating margin fell by 70 basis points.

Outlook

McCormick’s management expects the adjusted operating income to register 6%–8% growth in fiscal 2019. The benefits from improved organic sales and cost-saving initiatives will likely support McCormick’s operating income. However, cost headwinds, promotional activity, and marketing investments are expected to remain a drag.

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