McCormick (MKC) Q4 2025 earnings review
Acquisition Masks Core Margin Pressure
McCormick ended FY25 with a mixed bag: Q4 Sales grew 3% driven by Consumer strength, but Adjusted Gross Margin contracted significantly (-120 bps) as commodity inflation and tariffs bit harder than expected. While FY26 guidance implies massive headline growth (Sales +13-17%), this is almost entirely due to the consolidation of McCormick de Mexico. The core organic business remains in a low-growth gear (1-3%) with renewed pricing pressure needed to defend margins.
🐂 Bull Case
Despite raising prices 2.1% in Q4 to combat inflation, Consumer segment volumes still grew 1.0%. This elasticity resilience suggests strong brand power and effective marketing execution.
Operating Cash Flow hit $962M for FY25, up from $922M. This funded a 7% dividend increase (40th consecutive year) and strengthens the balance sheet for the Mexico integration.
🐻 Bear Case
Adjusted Gross Margin contracted 120 bps YoY in Q4 (39.0% vs 40.2%), a sharp reversal from the expansion seen in FY24. Higher commodity costs and tariffs are outpacing CCI savings.
Flavor Solutions continues to drag, with volumes negative (-0.9%) in Q4. The segment is struggling to find organic footing in EMEA (-1.3% organic sales) and relies heavily on pricing to stay positive.
⚖️ Verdict: ⚪
Neutral. The McCormick de Mexico consolidation provides a nice headline boost for FY26, but the core business is facing renewed inflationary headwinds that crushed Q4 margins. Investment depends on faith in their ability to pass through tariff costs without killing volume.
Key Themes
Gross Margin Reversal
Reversing. After expanding 90 bps in FY24, Adjusted Gross Margin hit a wall in 25Q4, dropping 120 bps YoY to 39.0%. Management flagged 'higher commodity costs, tariffs, and capacity investments' as the culprits. This contradicts the prior narrative that CCI savings would drive margin expansion.
McCormick de Mexico Consolidation
The acquisition of the remaining stake in the Mexico JV (closed Jan 2, 2026) is the primary engine for FY26. It contributes 11-13% of the projected 13-17% sales growth. This moves a high-performing asset from 'Income from Unconsolidated Operations' directly into Revenue and Operating Income, optically boosting growth metrics.
Flavor Solutions Volume Lag
Stable/Negative. While Consumer volumes grew, Flavor Solutions volumes fell 0.9% in Q4. EMEA was particularly weak with organic sales down 1.3% and reported sales down 1.1%. The segment is reliant on pricing (+1.6%) to show growth, indicating persistent softness in the industrial/restaurant customer base.
Tariff & Inflation Impact
Management explicitly cited tariffs and higher commodity costs as drivers for the margin hit. In response, pricing actions accelerated in Q4 (Total Company Price +1.9% vs +0.6% in Q3). This marks a shift away from the 'volume-led' pure play back to a price-mix reliance to defend profitability.
CCI Cost Savings
The Comprehensive Continuous Improvement (CCI) program remains the primary defense for Operating Income. Despite the gross margin drop, Adjusted Operating Income grew 3% (2% CC) in Q4, aided by lower SG&A expenses. Without these savings, the bottom line would have followed the gross margin decline.
Other KPIs
Stable/Positive. Up 4.3% from $922M in FY24. Cash conversion remains a highlight, supporting the dividend increase and acquisition strategy despite P&L volatility.
Accelerating. Up from 2.1% in 25Q3. However, the composition changed: Q4 growth was driven primarily by Price (+2.1%) rather than Volume (+1.0%), signaling a return to inflationary tactics.
Accelerating. Growth of 7.5% YoY beat the Q3 growth rate of 2.4%. Benefited from lower interest expense and a lower effective tax rate, masking the operational weakness in Gross Profit.
Guidance
Accelerating artificially. The massive jump from FY25's 1.7% growth is primarily due to the 11-13% contribution from the McCormick de Mexico acquisition. Excluding this, organic growth is guided at 1-3%, consistent with FY25.
Accelerating. A significant step up from FY25's 2.3% growth. This reflects the consolidation of high-margin Mexico JV income. Management notes 'Adjusted gross margin expansion' is expected to recover from 2025's dip.
Stable. Implied growth of 2% to 5% is relatively muted compared to the 16-20% Operating Income growth. Headwinds include a higher tax rate (approx 24% vs 21.5%) and higher interest expense associated with the acquisition.
Stable. Identical to the FY25 organic result (1.2%). Suggests management sees no significant change in underlying consumer demand or volume trends for the legacy business.
Key Questions
Gross Margin Recovery Visibility
Adjusted Gross Margin contracted 120bps in Q4 due to commodities and tariffs. You guide for expansion in FY26—is this purely due to the Mexico mix shift, or do you expect organic margin recovery in the legacy business?
Pricing vs. Volume Elasticity
Consumer pricing stepped up to +2.1% in Q4 from +0.6% in Q3. With volume growth slowing to 1.0%, are you seeing increased elasticity or resistance from retailers as you re-introduce pricing actions?
Flavor Solutions Turnaround
Flavor Solutions volumes have been negative for three consecutive quarters. With EMEA specifically struggling (-3.1% reported sales), what is the specific timeline for returning this segment to volume growth?
Inventory Build
Transaction expenses for 2026 include a 'step-up in inventory to fair value' for the Mexico acquisition. Can you quantify the expected P&L drag from this step-up flowing through COGS in Q1/Q2?