Confirming warnings it gave a month ago, McCormick & Co. Inc. said yesterday that although its spice and flavorings sales grew strongly this spring, economic turmoil in Mexico eroded its profits.
The Sparks-based company said its sales for the second quarter, which ended May 31, rose 12 percent to $445 million. But net income fell 16 percent to $16 million.
About half the decline was due to the recent devaluation of the peso in Mexico, where McCormick not only sells spices but is the biggest seller of mayonnaise, said Chief Financial Officer Robert G. Davey.
Although McCormick has maintained its dominant share of the Mexican mayonnaise market, the value of its sales and profits now shrinks when translated into dollars, he said.
Mr. Davey said that while he expects the economic troubles to continue through the summer, McCormick plans to ride through the country's current troubles. "Mexico is a very dynamic country . . . I was going to say volatile . . . But we see some business opportunities," he said.
He said the company is hoping to reduce another drag on its profits, high interest payments, by improving sales and reducing capital expenditures. The company expects earnings to rebound in the fourth quarter, he said.
Analysts said they weren't surprised by the results, since the company had already warned them to cut their profit estimates, but they said they were disappointed by the spice company's earnings slide.
"It's not new news, but it's not good news," said John McMillin, who follows McCormick for Prudential Securities Research in New York.
Mr. McMillin said that while many consumer product companies have seen their earnings sapped by the turmoil in Mexico, McCormick's difficulties have been amplified by trouble originating in Australia.
An Australian company, Burns, Philp & Co. Ltd., has been buying up competing spice brands such as Spice Islands, Durkee French and Tone Bros., and fighting hard for space on the shelves of U.S. supermarkets. One reason McCormick's interest costs are so high is that it has had to pay millions of dollars to supermarkets in "slotting fees," which are payments for the right to place items on grocery store shelves, Mr. McMillin said.
The practice can increase interest costs because companies often pay several years' slotting fees up front and amortize the carrying expense, Mr. McMillin said.
Both McCormick and Burns have seen depressed earnings as the spice battle has continued over the past several months, he said.
"I would like to think we've seen the worst of the battle," Mr. McMillin said. "Nobody's benefited" from the growing competition for spice sales "except, maybe, retailers," who are pocketing the big fees, he said.
Although he doesn't expect a turnaround this summer, Mr. McMillin said he believes McCormick will eventually show increased earnings. "There's going to be good news from McCormick, but it won't be released until the fourth quarter," he said.
After the announcement, McCormick's stock closed at $20.625, down 25 cents, in Nasdaq trading yesterday.