McCormick Earnings: Prudent Productivity and Portfolio Management Initiatives Prop Up Margins

The tide appears to be turning at wide-moat McCormick if second-quarter marks are a guide; the firm chalked up 10% organic sales growth (resulting from 11% higher prices and a 1% drawdown from lower volumes and unfavorable mix) while expanding adjusted gross margin by 310 basis points to 37.1%—a byproduct of efforts to raise prices, extracts costs, and prune lower-margins brands from its operations. This marks a shift for a business that has been struggling at the hand of supply chain disruptions and competitive angst. Although we perceived some of these pressures as transitory, we view its staunch commitment to investing in consumer-valued innovation and marketing as the impetus that should ensure its dominant competitive edge holds longer term. We forecast McCormick will expend around 5% of sales, $400 million annually, on research, development, and marketing to support its brand standing with consumers, retailers, restauranteurs, and packaged food behemoths.