McCormick Beats by a Penny - Analyst Blog
June 30 2011 - 11:24AM
Zacks
McCormick & Co. Inc. (MKC) posted results
for the second quarter of 2011 with operating earnings of 55 cents
a share, surpassing the Zacks Consensus Estimate by one cent. The
quarterly earnings benefited from higher operating income, as well
as cost saving actions.
Quarterly Sales Details
Total revenue in the second quarter grew 11% year-over-year to
$883.7 million from the year-ago quarter, benefiting from
McCormick’s favorable volume, product mix and pricing actions taken
to curtail increased raw and packaging material costs. Revenue also
exceeded the Zacks Consensus Estimate of $855 million.
Segments and Margins
Consumer business
Segment revenue for the consumer business surged by 10%
year-over-year to $499.0 million in the reported quarter, owing to
favorable currency exchange rates. Revenue for the McCormick‘s
segment also increased due to increased pricing, favorable volume
and product mix.
Operating income for the segment also increased 13% to $77
million largely resulting from higher sales and Comprehensive
Continuous Improvement (CCI) cost savings.
Industrial business
Segment revenue for the industrial business rose by 11%
year-over-year to $384.7 million in the second quarter of 2011
attributable to increased pricing, favorable volume and product
mix.
Operating income for the McCormick’s segment grew 10% to $32
million mainly from higher sales and CCI cost savings.
During the quarter, McCormick has offset the dollar impact of
higher costs with pricing actions and CCI cost savings. However,
the net effect of these factors led to a decline in gross margin in
the second quarter of 2011 to 39.7% from 40.9% in the second
quarter of 2010. Further, McCormick expects a decline in gross
margin to continue through the second half of 2011.
Moreover, McCormick’s pricing actions and cost savings from CCI
are expected to offset increased material costs for fiscal year
2011. Although the material costs have increased beyond the initial
projection of McCormick, the company currently expects to achieve
at least $45 million of cost savings from CCI in 2011, up from its
initial projection of at least $40 million.
Capital Structure
McCormick has earned solid cash flows from continuing operations
of $36 million till the second quarter of 2011 as against $65
million in the year-ago period due to higher inventory levels.
Inventory increased due to higher cost of materials, the impact of
currency exchange rates, and raw material possession to assure a
constant supply of product. In order to improve inventory levels,
McCormick is currently implementing a new inventory management
process.
McCormick's Board also declared a dividend of 28 cents per share
for the quarter, which is payable on July 25, 2011 to shareholders
of record as on July 11, 2011.
Acquisition
Acquisitions and joint ventures have remained top priority for
McCormick. During June, McCormick signed an agreement with
India-based Kohinoor Foods Limited for an 85% interest in a joint
venture to market a leading brand of basmati rice and other food
products in India. McCormick will consolidate sales and profit from
Kohinoor in its financial results, with a minority interest
reduction to net income for the 15% of the business it does not
own. The acquisition is expected to close in the third quarter of
2011.
McCormick also agreed to acquire 100% of the shares of Kamis
S.A., which is a leader of spices, seasonings and mustard in Poland
with annual sales of approximately $105 million. The acquisition is
expected to close by the end of third quarter of 2011, and the
profits in the businesses will be minimal in 2011 due to
integration costs and initial investments in growth, but is
expected to be 7 cents-9 cents accretive to earnings per share in
2012.
The acquisition has led to a decline in the second quarter with
the remaining $7 million expected to lower earnings per share in
the third quarter by 5 cents.
Besides, McCormick will invest in its brands in the third
quarter of 2011 with at least $6 million of incremental marketing
which includes an emphasis on brand value, a U.S. campaign behind
Hispanic products and advertising for the Zatarain’s brand.
Outlook
For fiscal year 2011, management reaffirmed its earnings per
share guidance in the range of $2.74 to $2.79, including the
estimated transaction costs related to recent announcements of an
acquisition and a joint venture. Sales are expected to grow 6 to 8%
in local currency, including 1% of incremental sales from Kohinoor
and Kamis. In addition, the sales impact of favorable currency
exchange rates is now estimated to be 2%.
McCormick which competes with ConAgra Foods,
Inc. (CAG) and Krafts Food Inc. (KFT)
currently holds a Zacks #3 Rank translating into a short term
‘Neutral’ rating.
CONAGRA FOODS (CAG): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
MCCORMICK & CO (MKC): Free Stock Analysis Report
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