CHICAGO – Spice seller McCormick & Co. Inc. (MCK) Thursday cut its earnings outlook for the full year due to the strengthening U.S. dollar and its shares fell to their lowest level in 2-1/2 years.
The reduced forecast came along with a slight dip in McCormick's second-quarter profit, as higher costs for vanilla beans and increased interest expense offset sales of new products and growth from its November acquisition of Silvo, a Dutch spice company.
Reuters Estimates listed the average analyst earnings expectations as $1.71 per share for the full year and 39 cents for the third quarter.
With the U.S. dollar now strengthening against key overseas currencies, McCormick said it expected foreign exchange to be neutral instead of a benefit in the second half of the year. Some of its key currencies include the euro, the British pound and the Mexican peso.
But analysts said that the company's prediction about foreign exchange could be risky because of the volatility of the euro and other foreign currencies.
"I don't think anybody knows where the euro is going to be," said Alton Stump, an analyst for Longbow Research. He added that the company's assumptions could hurt earnings in the second half.
McCormick offsets possible foreign exchange volatility from spice-producing countries in Africa, Southeast Asia and Latin America by diversifying its sources of raw materials, Joyce Brooks, an investor relations representative for the company, told Reuters.
For its operations in Europe and Asia, the company plans to thwart foreign exchange risks by hedging to cover purchases in those locations, she said.
"Yes that will help, but is not going to solve their problems," said Stump.
McCormick also said it expects slower growth in its industrial business, which represents half of sales and provides spices to food manufacturers and restaurants.
But the rising cost of vanilla, which hurt the company in the past year, should not affect business in the second half, company officials said during a conference call with analysts.
McCormick said it expects higher sales and improvement in margins to boost second-half earnings per share by 16 to 20 percent.
John McMillin, an analyst for Prudential Equity Group, said in a research note that the company's earnings expectations are "way too optimistic." He lowered his price target to $30 from $32 and gave the company's stock a "neutral" rating.
Longbow analyst Stump added that the company will have to take a lot of cost savings measures or buy back shares to get the earnings per share growth it expects.
McCormick on Thursday set a new $400 million share repurchase program.