McCormick’s stock drops despite improved profit forecast, positive response to innovation

04-Oct-2023 - Last updated on 04-Oct-2023 at 11:15 GMT

Source: McCormick & Co.

Spice and flavor giant McCormick & Co.’s stock tumbled double-digits yesterday despite beating analyst expectations during its third quarter and laying out a solid multi-prong plan to drive volume and engage consumers going forward as investors became hung up on the company’s slower-than-expected economic recovery in China and a disappointing drop in underlying sales volume.

Within hours of the company’s third-quarter earnings call, in which leadership reported net sales were up 6% year-over-year – topping an expected 5.7% increase, McCormick & Co.’s stock fell 10.3%. Over the course of the day, stock regained some altitude, but not much – coming in 8.46% below the previous day when the markets closed.

The sell-off could be due to slower than expected recovery in the APAC that overshadowed gains in the Americas and EMEA. Or it could be related to a 2% dip in volume and product mix – 1% of which the company attributed to slower-than-expected recovery in China and 1% to the divestment of the Kitchen Basics business and the related exit of the consumer business from Russia. Excluding these events, the company reports sequential improvement in the underlying volume growth, which was flat for the quarter compared to the 1% drop in the second quarter.

Despite the company’s struggles in EMEA, CEO Brendan Foley told investors and analysts during a third-quarter earnings call yesterday that overall results were in line McCormick’s expectations and that he feels “energized by our underlying business trends, which reinforce our competitive advantages and differentiation.”

This optimism is reinforced by early and projected returns on the company’s multi-prong plan to grow market share, distribution and consumer engagement through innovation, renovation, high-profile partnerships and supply chain recovery as well as the ongoing “fundamental strength of the spices and seasonings category” and cooking at home trend, Foley explained.

Renovated products deliver high-teens velocity improvement

To meet evolving and increased demand for spices in the Americas, and better support new home cooks who emerged during the pandemic, McCormick remains focused on renovating its core everyday spice and herb portfolio in the US, said Foley.

This includes a new package design that is flushed with nitrogen to better retain freshness until the initial opening and a lid that more easily snaps – and noisily clicks – to reassure consumers it is closed, Foley said. He added the new package is made of 50% post consumer recycled plastic and “has a great appearance on the shelf overall,” which further helps with consumer engagement and velocity.

“We have shipped about 40% of our renovated SKUs, and notably products that have transitioned on shelf have seen high-teens improvement in velocity,” he said.

Marketing and innovation should boost velocities, distribution

McCormick is driving additional consumer engagement and velocity through a series of high-profile partnerships and marketing efforts related to innovation.

For example, the company partnered with Mars in July to launch a limited-edition French’s mustard-flavored Skittles with the goal to “create top-of-mind awareness for French’s through a buzzworthy moment to further strengthen the power of our brand,” Foley said, adding the campaign garnered a record 5bn impressions.

In addition, the company is teaming with celebrity British chef Nadiya Hussain to launch a range of short seasonings, recipe mixes and meal kits in an effort to replicate the success McCormick had in its partnership with Tabitha Brown.

Looking forward, Foley said he is excited about the holiday season and the company’s marketing plan across all regions – which is possible in part because McCormick has overcome supply chain challenges that held it back last year during the holidays.

Finally, Foley said he expects improvements in upcoming quarters because price gaps are finally starting to close between McCormick, which moved faster than many competitors, and private label, which in recent months has raised prices to offset inflationary pressures.

McCormick reaffirms guidance

Based on these strategic moves and shifts in macrotrends, Foley reiterated that the company feels “pretty confident about our ability to continue driving sequential improvement, whether it is in spices and seasonings or across other categories.”

As such, the company reaffirmed its full year sale and operating income, despite lower benefit from China, and now expects sales to be closer to the middle of the range and operating income to benefit from strong profit realization.