McCormick shares drop 11.8% after outlook is revised

Officials seek to reassure investors on plan to revive sales to industrial buyers

September 08, 2005|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

A day after McCormick & Co. Inc. lowered its earnings forecast for its third quarter and fiscal year, shares of the Sparks-based spice maker fell nearly 12 percent and the company sought to reassure investors about its plan to reverse weakness in sales to industrial customers.

McCormick's industrial business has been hurt by stiff competition from smaller spice companies that have undercut prices and delays in new product launches by food manufacturers that buy McCormick flavorings, Robert J. Lawless, McCormick's chairman, president and chief executive, said yesterday. The company has also struggled this year with the high cost of vanilla.

"This is by far the most difficult year we've ever had in my 10 years as CEO," said Lawless, who held a conference call with analysts.

On Tuesday, McCormick lowered its earnings forecast for the second time this year and said it would take steps to cut manufacturing and administrative costs and reduce the number of items it sells through retailers to eliminate some of the lower-margin products.

The company also said that damage from Hurricane Katrina is expected to hurt retail sales of brands such as McCormick's New Orleans-based Zatarain's line of packaged foods and spices.

During the conference call yesterday morning, Lawless said the company anticipates lost retail sales in the crucial fourth quarter in areas hit by the hurricane, Zatarain's strongest market.

"We expect demand for Zatarain's brand to be affected," Lawless said. "Our retail customers report numerous stores closures, without a clear idea of when they will open or if they will."

The company said it is still trying to account for all of its more than 200 Zatarain's employees in Gretna, outside of New Orleans, but had no estimates on how many have been located.

"We're currently assessing the impact on Zatarain's employees and our facility," Lawless said. "And we intend to do what we can to ensure [employee] safety and provide financial assistance."

For now, the company is continuing to manufacture and ship Zatarain's products from alternate sites, he said.

Shares of McCormick closed at $29.28 yesterday on the New York Stock Exchange, down $3.93 - 11.8 percent.

McCormick's earnings revision prompted a number of financial firms, including Baltimore-based Legg Mason Inc., to downgrade the company's shares yesterday.

"While we continue to view the ... shares as having significant upside potential, the weaker earnings outlook this year, a clouded view of fiscal 2006 and some as-yet unexplained problems on the industrial side suggest the shares may languish for a period," Terry Bivens, a research analyst, said in a report issued yesterday. "We are especially disappointed in light of a confident presentation on earnings during the June 30 second-quarter conference call."

During yesterday's call with analysts, Lawless laid out a three-pronged plan to boost the company's financial performance. It includes reviewing the global industrial business, restructuring top management and consolidating or closing manufacturing and distribution facilities, and eliminating redundant administrative functions over the next two to three years.

In an interview after the conference call, Lawless said he could not elaborate on the cost-cutting measures, which he said would be done in phases.

"Over time, there will be impact on jobs, but our plan all along is to try to have attrition cover the jobs," Lawless said.

Some analysts remained unconvinced.

"There's still a lot of gray area in terms of how they're going to improve their cost savings in '06," said Alton Stump, a senior research analyst with Longbow Research in Cleveland. "They didn't have a clear answer."

The company is also in the early stages of a plan to reduce the number of items sold in its consumer and industrial businesses to eliminate lower-margin items - a move the company said would affect sales in the short term.

Stump said he was concerned that the company would take out more items from its consumer business in Europe, especially in France, where it is facing stiff competition from companies selling "value brands" of spices in discount stores.

"Until the market competition settles down in Europe, taking out [items] is going to hinder the top-line growth potential within that business," Stump said. "In my opinion, what you have here is a trend in France that has taken place elsewhere in Europe. We're just starting to see the beginning of the rise in value brand in that region."

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