McCormick & Co

McCormick's organic sales grew nearly 2% in the fiscal second quarter, driven by higher prices. Adjusted gross margin expanded 270 basis points to 40.2%, including a 140-basis-point tariff refund benefit, as cost savings offset inflationary pressures. Shares rose about 5% in early June 25 trading.

Why it matters: McCormick's consumer arm fell victim to macro and competitive issues, with volume down 2%. However, we think the firm is pursuing a prudent course anchored in juicing brand investment, expanding distribution, and altering price packs. We forecast 3%-4% long-term segment growth. The flavor solutions business (40% of sales) was a bright spot, as organic sales grew on higher prices (1.5%) and increased volume (1.4%). We think this partly reflects increased innovation and reformulations by other packaged-food and beverage firms. We've long held that McCormick is positioned to benefit from a growing penchant for healthy products as its portfolio caters to health-conscious consumers who are cooking more at home. Unlike peers, it can leverage those insights with consumer packaged goods and restaurant customers.

The bottom line: Our $65 fair value estimate for wide-moat McCormick holds. Shares trade at a 25% discount to our intrinsic valuation, offering an attractive entry point. We think the market's concerns about tepid consumer spending and risks from the impending deal for wide-moat Unilever's food business fail to account for McCormick's stout brand standing, buttressed by its commitment to investing behind its brands.

Coming up: We see merits in the proposed combination with Unilever's food arm, such as enhanced scale and distribution reach in condiments and cooking aids. While integration and financing risks are tangible—the deal more than doubles McCormick's sales—the firm has proved a stout acquirer in the past. Further, we're encouraged that Unilever will own around 10% of shares outstanding and maintain board and executive representation.

We're holding the line on our $65 per share fair value estimate for McCormick, which incorporates our expectations around its planned $44.8 billion tie-up with Unilever's food brands. The deal stands to more than double McCormick's sales base by adding brands that boast low 20s operating margins, outpacing the midteens that McCormick's mix has historically chalked up. Management expects organic sales and adjusted earnings per share to grow at low-single-digit rates in fiscal 2026, with the deal slated to close in mid-2027. This outlook reflects persistent costs stemming from commodities and tariffs.

Consumer segment sales should ultimately prove resilient as households forgo away-from-home food consumption and instead dine at home amid unrelenting financial constraints. With its leading position in the spice aisle and the affordability of its fare (which McCormick has been touting in recent marketing placements), we expect it will continue to win on shelf, fortifying its dominant market share. To facilitate this, we posit the firm will continue investing in research, development, and marketing to underscore the differentiation of its brand mix and support its entrenched retail relationships. As such, we forecast that McCormick will allocate around 7% of its yearly sales to its brands, on average, after the deal closes.

Concerns percolate around the impact of the growing adoption of GLP-1 drugs on the industry, but we believe McCormick is uniquely positioned to navigate these uncertain waters. While some consumers may increasingly shun center-store packaged food categories, McCormick's diversified portfolio should prove advantageous. Its spices and seasonings cater to consumers who cook more produce and proteins at home. In addition, the flavor offerings it sells to other packaged food and beverage manufacturers should increase as these operators work to tailor their mix to the healthier fare this cohort demands. As such, we expect this trend to aid its long-term top-line growth trajectory, supporting our 3% annual sales forecast.

From a profit perspective, although management had delayed its enterprise resource planning upgrade due to the pandemic and subsequent supply chain disruptions, we still see the merits of this technology modernization effort (which is expected to cost $300 million-$350 million), as it's replacing a system that was put in place in the early 2000s, when the firm was half the size it is now. This is particularly critical given unrelenting input cost pressures (which management pegs at mid-single-digit percentages in fiscal 2026) that are likely to constrain margins in the near term. However, we anticipate the firm will pursue alternative sourcing plans, cost-saving initiatives, and surgical pricing to blunt the hit over time. And as a byproduct of its tie-up with Unilever, management targets extracting $600 million in cost savings, anchored in procurement, manufacturing, and back-office efficiencies, which strikes us as tangible. As such, we expect operating margins to approximate the low 20s at the end of our 10-year explicit forecast.

We surmise McCormick has amassed a wide moat rooted in its intangible assets and a cost edge, and we don't believe the impending addition of Unilever's food brands will alter its standing. McCormick’s commanding leadership in the global flavor industry is reinforced by a commitment to leveraging its vast resources, dominance in low-priced private label, and scale. Further, we think the firm is a critical partner for retailers, which depend on McCormick to drive traffic and ensure consistent product availability. McCormick harnesses rich customer insights to deliver tailored branded flavor solutions to food manufacturers and foodservice customers, cultivating enduring partnerships. In line with our view, we forecast excess returns on invested capital over the next 20 years.

McCormick’s dominance in the consumer segment, slated to represent 70% of sales after the deal closes, is illustrated in its control of one-fifth of the $17.5 billion global herbs and spices market, which exceeds its closest branded peer by a factor of four. McCormick’s herb and spices portfolio (more than 40% of its stand-alone consumer segment sales) features leading brands—like its namesake, premium McCormick Gourmet and Gourmet Garden, value-oriented Lawry’s and Old Bay, and regional stars like Schwartz and Ducros. This brand edge is also evident in its sauces and condiments offerings (around one-fourth of consumer segment sales), whereby strategic acquisitions (RB food brands, Cholula, and now Hellmann’s) and McCormick's robust retail partnerships have facilitated enhanced brand distribution (increasing Frank's RedHot global market share from 4.9% in 2017 to 6.4% in 2025). Further, the company ascended to the top position in the global chili sauce market, which has been boasting outsize growth. Additionally, the RB deal solidified McCormick’s top North American share position in mustard, boasting a 36% share–over twice the size of its nearest rival, narrow-moat Kraft Heinz, at 14%.

We contend that McCormick’s market share leadership and growth across categories is a byproduct of steadfast brand investments. McCormick dedicated 1.5% of its sales to research and development over the past five years, translating into about $100 million in 2025 (illustrated by line extensions, refining flavor profiles, and diversifying pack sizes). The firm also invests around 4% of its sales in marketing activities annually, equivalent to about $275 million in 2025. We think the fruits of these efforts have manifest in modest pricing power, evidenced by average price increases of around 3% and an approximate 1% increase in volume over the past six years. We don’t think the firm will back down from these investments, which drive our projections of around 1% and 6% of sales spent on R&D and marketing, respectively.

Beyond its flagship branded offerings, McCormick's dominance in the global flavor industry has been underscored by its status as North America's top provider of private-label seasonings. In this context, McCormick offers to supply private-label products and conducts channel tests to show that stocking both branded and private-label is more advantageous, ultimately boosting overall category sales for the retailer. Despite the lower margins for McCormick, our estimates suggest that private-label sales constitute less than 10% of its consumer product revenue, or a mid-single-digit percentage of total sales. This proportion is too small to negatively affect consolidated margins, yet enhances its retail partnerships.

We believe McCormick has also carved out an edge in flavor solutions, particularly in the flavors (56% of existing flavor solutions segment sales) and branded foodservice (about one-fifth of flavor solutions segment sales) subcategories, which are more insulated, value-added solutions. In flavors, McCormick is a critical partner for consumer packaged goods manufacturers, delivering unique ingredients and tailor-made solutions rivals cannot exactly replicate, thanks to patented technology. We believe that McCormick’s ability to tap into consumer insights gleaned from its consumer products division and extensive retail collaborations aids its flavors business. McCormick boasts years of partnership with nine of the top 10 CPG firms, 20 global creation and application labs to better connect with local clientele, and the capacity to bid on over 10,000 briefs per year. We estimate that McCormick commands a single-digit share of the $20 billion flavor and fragrance market. Ultimately, we believe the barriers to entry are high due to the industry’s concentration, substantial investment requirements, demand for highly skilled labor, and stringent quality control standards, making it difficult for new entrants to gain a foothold.

Complementing its intangible advantage, we believe the firm’s strong brand and robust retail relationships contribute to a cost advantage in the consumer products segment, anchored by economies of scale. During the 2020 pandemic, we believe its scale enabled it to leverage its expansive supply chain and favorable vendor relationships to secure necessary inputs without interruption, giving it an edge over smaller peers when supply levels waned. This enabled McCormick to increase its share of the US herbs and spices market by nearly 2%. At the same time, its three main category competitors experienced market share declines, a testament to the benefits of its network.

Upon examining the five-year average direct operating margin (homing in on manufacturing and distribution costs)—excluding advertising, R&D, noncash expenses such as depreciation and amortization, and nonrecurring costs—McCormick has a 25% margin, generally in line with the average across our packaged food universe, which arguably skews toward more competitively advantaged names. However, excluding the less profitable flavor solutions arm would yield higher margins, reinforcing our stance that the consumer products segment boasts a cost edge.

We see the merits of McCormick's technology modernization effort (buoying future sales growth), as it is replacing a system that has been in place since the early 2000s, when the firm was less than half the size it is now.

If consumers' penchant for cooking at home (jump-started by the pandemic) persists as a means to stretch budgets, McCormick's sales could surpass our expectations.

McCormick is positioned to benefit from a growing appetite for healthy products as its

portfolio caters to health-conscious consumers in both its consumer and flavor solution segments.

Cost pressures (particularly labor, transportation, and tariffs) have yet to subside, capping near-term profits.

The massive tie-up with Unilever's food brands stands to more than double McCormick's consolidated sales base. There is a significant risk in bringing these two businesses together.

McCormick's flavor solutions arm isn’t immune from traffic and volume pressures that have been dogging restaurants and other packaged food firms. These pressures could weigh on segment sales and profits.