McCormick (Short)
McCormick (Short)
McCormick is an American company that both produces and distributes spices to different outlets. Throughout 2022, most of the companies coming out with a report had decreased profit margins due to the rising product costs. This was especially true for the food sector as consumers decided to decrease their spending habits on top of companies having to deal with high operation and transportation costs. I believe this will be the case for McCormick as well. From Walmart’s and Target’s reports, I realized that it wasn’t just one specific type of food or snack that has been affected by the inflation and rather it was the entire food sector as a whole. For example, considering Walmart, they sell every type of food available and they saw a decrease in revenue and growth in everything which goes to the fact that every food company in this food industry is being impacted. I personally don’t know much about the operating costs or profit margins of spice companies, however, if I had to assume, I would guess that it’s much lower than the traditional companies that specialize in producing different types of foods and snacks. Spices are usually one of the cheapest things available for sale at stores for your food so any high price increase wouldn’t be justifiable. The profit margins would also be much lower due to their low price. More importantly, spices aren’t something that people buy everyday and a pack of it could last consumers as long as months. Due to rising fuel costs, the transportation of these products will also double or triple as McCormick is also responsible for their distribution. I’m assuming stores will also be buying a lower quantity as the consumer spending has decreased and they won’t be buying as much as they used to anymore. Many spices also contain ingredients such as wheat flour and due to the food shortages we are experiencing right now, I believe McCormick won’t be able to produce as many spices as they first anticipated which will cut into their profit margins. Another factor about spices is that they have very long expiration dates, most of them lasting as long as years. So if we had to consider customers that buy in bulk, such as restaurants, I don't think they will be contributing to their revenue as much as they contribute to other company’s revenues due to how often they buy them. Recently, I have also been seeing a lot of ads on affordable meal packages that get automatically sent to your homes on a daily or weekly basis. These are mostly dried food that you only have to prepare by heating up or boiling. This is definitely something that many people who don’t have the skills or time to cook will take advantage of and in return, purchase those memberships instead rather than spending their money on food ingredients such as spices. As compared to other companies, they also don’t have much advertising power to attract new customers. For example an ad on paprika powder or peppers would be much less attractive to a buyer vs an ad on a mouth watering hamburger or a refreshing drink. As the quarter they are reporting on was also during the summer, I believe this will be a disadvantage to them which is usually the opposite for other companies. The time people spend out the most or go on vacations the most is during the summer. As this reduces their time at home to cook, most of them decide to get their food at restaurants or hotels instead which in return decreases their use of food ingredients such as spices.
Other people’s point of view:
For Q3, the Street expects MKC to report adjusted earnings of $0.73 per share, lower than the prior-year period’s EPS of $0.80 per share. Meanwhile, the consensus revenue estimate is pegged at $1.59 billion, implying year-over-year growth of 2.6%. On September 7, MKS issued weak preliminary numbers for the third quarter and also cut its full year 2022 guidance, citing supply chain constraints, divestiture of the Kitchen Basics unit in Q3, changing buying patterns, and rising costs.
McCormick expects 2022 sales to register 3% to 5% year-over-year growth (in constant currency) versus previous guidance of 5% to 7% growth. The company expects 2022 adjusted EPS for 2022 to range between $2.63 and $2.68 (much lower than the previous guidance of $3.03 to $3.08).
The company is hit by turmoil caused by slower growth and inflation this year.
Ever-expanding valuations have created a very tough set-up amidst current declining earnings and valuation pressures caused by higher interest rates.
Report time: Tomorrow before market opens
Expected movement: -2%
P/E Ratio: 28.97
Market Cap: 19,699,686,739