Analyst Note| Erin Lash, CFA |
Even in the face of competitive headwinds, inflationary pressures, and supply chain constraints, McCormick continued to evidence the durability of its wide moat in the third quarter. More specifically, it boasted respectable sales growth (up nearly 1% on top of the solid 9% levels chalked up last year), reflecting increases in both volume and price. And although margins were a bit tarnished by the pronounced acceleration in costs (related to commodities, packaging, freight, and labor, which management alluded to as the highest in the past decade or two), we maintain that McCormick possesses a deep arsenal (the pursuit of sustained cost savings, higher prices at the shelf, and the ability to racket back discretionary spend) through which to offset these challenges. In this context, while gross margins were down 260 basis points to 38.7% (it has only reported a lower metric once in the past 26 quarters) and adjusted operating margins were off 150 basis points to 17.6%, we forecast improvement to the low-40s and around 20%, respectively, over our explicit 10-year forecast.