Given the company’s strong sales growth, increased household penetration and high repeat rates over pre-pandemic levels, the market’s negative response to McCormick was not related to its earnings, but rather its grim assessment of the current landscape and its potential negative impact on the future.
“We’re experiencing the highest inflationary period of the last decade or even two,” and at the same time “facing additional pressure on our supply chain due to strained transportation capacity and labor shortages and distribution,” CEO Lawrence Kurzius told investors yesterday during the company’s earnings call.
“These pressures not only impact costs, but also negatively impact sales as the addition of further supply chain complexity makes it harder to get orders shipped and received by customers,” he explained.
In response, McCormick has expanded its US manufacturing capacity to help fill orders, but Kurzius acknowledged that “some products remained stretched by sustained high demand,” and the company is struggling to replenish both retailer and consumer inventories in the third quarter.
Despite these challenges, Kurzius emphasized that “shelf-conditions are improving and we’re seeing sequential improvement in our share performance.” He also noted that McCormick is “better positioned than we were last year entering the holiday season and are confident in our holiday merchandising plans.”
‘The phase-in of most of our actions is taking place during the fourth quarter’
While consumers likely will be pleased to find McCormick products back on store shelves, they could push back against imminent price increases needed to offset the inflation and supply chain challenges.
“We have raised prices, where appropriate, but as usual, there is a timeline lag associated with pricing, particularly with how quickly costs are escalating. And therefore, the phase-in of most of our actions is taking place during the fourth quarter,” Kurzius said.
He added the company may need to take additional price increases to continue to offset rapidly accelerating cost pressures, and supply chain challenges, which Kurzius said he expects will continue into 2022.
Kurzius stopped short of providing guidance for 2022, but said he is confident that McCormick will remain a growth company, even in the face of adversity.
“At the foundation of our sales growth, due to the rising consumer demand for flavor fueled by younger generations. We’ve intentionally focused on great categories that are growing and generating a long-term tailwind,” he said, adding: “We’re capitalizing on the long-term consumer trends that’s accelerated during the pandemic and we’re successfully executing our strategy and initiatives.”