Spices maker McCormick benefits as Gen Z cooks more but won't sacrifice flavor

By Steve Gelsi and Tomi Kilgore

Stock rallies as profit rose above expectations and full-year outlook was raised, with volume increasing for the first time in years

Shares of McCormick & Co. Inc. edged higher Tuesday, after the spices and flavor company beat fiscal third-quarter profit expectations and raised its full-year outlook, as volume increased for the first time in about three years.

"This quarter we reached a meaningful milestone by delivering total global positive volume growth, reflecting improved trends across both segments, and we expect this momentum to continue into the fourth quarter," said Chief Executive Brendan Foley.

The stock (MKC) climbed 1.4% in morning trading, to buck the selloff in the broader stock market. The Consumer Staples Select Sector SPDR ETF XLP, of which McCormick's stock is a component, shed 0.2% and the S&P 500 index SPX dropped 1.4%.

On the post-earnings call with analysts, Foley provided a summary of the current "challenging" environment for consumers, who are stretching their budgets and reducing waste. But that has been a good thing for the company.

"They are exhibiting value-seeking behavior, making more frequent trips to the grocery store with smaller baskets and shopping just for what they need," Foley said, according to a FactSet transcript.

He said traffic at restaurants remains soft across most types, but particularly in quick-service, or fast-food restaurants.

"These trends are starting to benefit growth in food at home, and this shift is driven by older generations, as well as lower-income households," Foley said.

He said the company's Gen Z consumers, who are generally defined as those born between 1997 and 2012, is also cooking from home. As they seek seasoning blends that make cooking easier, they are leaning into "higher quality and premium flavor" items.

"We're seeing velocity pick up on our gourmet line, and it's coming from Gen Z as they seek to recreate restaurant quality meals," Foley said.

And as people cook more from home, McCormick benefits by providing spices, seasonings, condiments and sauces: "Flavor is not something consumers are willing to sacrifice," Foley said.

For the quarter to Aug. 31, McCormick reported net income that rose to $223.1 million, or 83 cents a share, from $170.1 million, or 63 cents a share in the year-ago quarter.

That beat the FactSet consensus for earnings per share of 67 cents.

Sales slipped 0.3% to $1.68 billion, but topped the FactSet consensus of $1.67 billion.

Sales reflected 1% volume growth, the first growth reported since fiscal 2021, which was offset by pricing and the company's decision to divest a small canning business.

Sales from the company's consumer segment inched up to $937.4 million from $937.1 million, to top the FactSet consensus of $930.3 million, while flavor solutions segment sales eased to $742.4 million from $747.6 million but beat expectations of $732.2 million.

Gross margin improved by 1.7 percentage points to 38.7%, as the cost of goods sold declined 3%.

Looking ahead, the company raised its adjusted EPS guidance range to $2.85 to $2.90 from $2.80 to $2.85.

Chief Financial Officer Mike Smith said the final fiscal 2024 EPS results are expected to be "close to the high end of the range," as the tax rate should improve.

McCormick's stock has surged 22% year to date, to boost the company's market capitalization to $22.42 billion. In comparison, the SPDR consumer staples ETF has gained 15% this year and the S&P 500 has advanced 19.2%.

-Steve Gelsi -Tomi Kilgore

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10-01-24 1121ET

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