I don't know about you, but I love McCormick's Montreal Steak Seasoning. Oh, I love all of their "Montreal" offerings as well as a few others. In my house, where I am the primary "chef" but also Irish-American, I can use all of the help I can get. I certainly have done my part, especially since the pandemic to help support the earnings release that we are about to discuss.
For the firm's first quarter, which ended February 28th, McCormick & Company (MKC) posted an adjusted EPS of $0.59 (GAAP EPS: $0.52) on revenue of $1.56B. The firm made adjustments for $27.8M worth of "special charges" which accounts for the difference of $0.07 per share. The performance did beat Wall Street's expectations for both the top and bottom lines, while that revenue print was good enough for year over year growth of 2.6%.
Cost of goods sold increased 4.2% to $1.002B. This took the gross profit margin down to 36% from 36.8% for the year ago comp. Operating income as reported, decreased 3.8% to $199M. Adjusted operating income fell fractionally to $226.8M. This took the firm's adjusted operating margin down to 14.5% from 14.9%. Net income dropped 10.2% to $139.1M. Once adjusted, net income fell 5.7% to $160.4M.
Segment Performance
- Consumer Segment generated sales of $909.5M (-1.8%, +0.8% in constant currency), producing operating income of $173.4M (+3.8%).
- Americas drove sales growth of 3.3% (+3.8% in cc)
- EMEA drove a sales growth of -8.8% (-2.1% in cc)
- Asia/Pacific drove a sales growth of -15.1% (-8.1% in cc)
- Flavor Solutions Segment generated sales of $656M (+10%, +12.3% in constant currency), producing operating income of $53.4M (-11.2%).
- Americas drove sales growth of 12.7% (+12.2% in cc)
- EMEA drove a sales growth of 6.8% (+16.8% in cc)
- Asia/Pacific drove a sales growth of -1.1% (+5.1% in cc)
Guidance
For the full fiscal year, McCormick reaffirmed prior guidance. The firm sees sales growth of 5% to 7%, but expects operating income to grow 10% to 12% and adjusted operating income to grow 9% to 11% after accounting for roughly $50M in special charges as well as $75M in expected cost savings.
McCormick also expects to produce GAAP EPS for the full year of $2.42 to $2.47. However, after adjustments, the firm sees EPS in a range spanning from $2.56 to $2.61. This would push the midpoint above Wall Street's $2.57 consensus view and would be up from the $2.53 year ago comp. This is why the stock is trading higher on Tuesday.
Fundamentals
For the quarter reported, McCormick produced operating cash flow of $103.9M, after accounting for capital expenditures of $61.5B. This left the firm with free cash flow for the three months of $42.4M. The firm paid out $104.6M in dividends to shareholders, which is a little wonky. The 2.11% yield might be nice, but returning cash to shareholders should be kept within the limits of free cash flow, not amount to more than operating cash flow.
McCormick ended the period with a cash position of $356.8M and inventories of $1.345B. Both of these numbers were up, but in line with where they were three months back. This brought current assets up to $2.411B. Current liabilities add up to $3.321B, including $1.586B in shorter-term debt. This puts the firm's current ratio at an uncomfortable 0.73, and its quick ratio at a ghastly 0.32.
Total assets amount to $13.205B. However, this number includes $8.612 in goodwill and other intangibles. At 65% of total assets, I find that to be well past levels that would make me squirm. Total liabilities less equity comes to $8.318B, including $3.62B in long-term debt. Combined, long and short-term debt total $5.206B.
Remember, the firm's cash position above was a mere $356.8M. No, this balance sheet does not pass muster, and the fact that the firm is paying more in dividends than what they are driving in operating cash flow makes me doubt the firm's seriousness in addressing and correcting these fundamental issues.
Wall Street
I don't see a single reaction this morning from Wall Street's peanut gallery. I did notice though that since the start of the year, MKC has gained only one "outperform" (buy-equivalent) rating and that was in late January. Over that same timeframe, MKC has landed four "sell" or sell-equivalent ratings and three "hold" or hold-equivalent ratings. Not very impressive.
My Thoughts
I see the stock up some 11% on the day, trading with an $81 handle. Yes, the guidance was solid. However, the cash flow situation is improperly balanced and the balance sheet itself is in need of major repair work. I think that McCormick, even though they make my food tastier, is a "short" on today's pop.
I can not act until this piece is public. My expectation is that MKC will fail to hold its 200 day SMA (simple moving average) ($80) and I will likely short a trade sized (smaller than investment sized) number of shares up here. My target as I do not like to stay short anything for very long will be the 50 day SMA ($74), with my panic point likely 3% above my net basis.
