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McCormick (MKC -1%) is trading lower after kicking off FY25 on a down note. This supplier of spices, seasoning mixes, and condiments reported its first EPS miss after eight consecutive quarters with in-line or upside results. Revenue for Q1 (Feb) rose 0.2% yr/yr to $1.61 bln, which was generally in-line but followed four consecutive upside quarters, so this was a slight letdown. Probably the best part was MKC reaffirming FY25 guidance despite lackluster Q1 results.

• MKC operates two segments: Consumer (57% of FY24 revs; 69% of operating income) and Flavor Solutions (43%; 31%), which caters to food manufacturers and food service customers. Its Consumer segment tends to sport better margins than its FS segment. Total organic sales growth in Q1 was +2% driven by volume and product mix.
• Consumer segment sales were flat yr/yr (+1% organic) at $919 mln. Organic sales reflected a 3% increase in volume/mix, offset by a 2% decrease in pricing. Importantly, MKC made some price gap management investments last year, so it was lapping a tougher comparison. MKC also made some targeted incremental promotions in the Americas. China consumer sales improved slightly, which is more optimistic than what MKC said on the Q4 call.
• FS segment sales increased by 1% (organic +3%) to $686 mln. Organic sales saw a 2% increase in volume and product mix and a 1% increase in pricing. MKC said its FS results reflect a strong performance with faster-growing Flavor customers and improved QSR growth, which was partially offset by soft CPG (consumer packaged goods) customer volumes.
• In terms of the macro environment, MKC said there is increasing consumer uncertainty and concern over returning to more inflation. This has impacted consumer sentiment, particularly in the last month. As such, consumers, especially lower-income consumers, are more cautious and are exhibiting more value-seeking behavior and tightening their budgets. Many are worried about the future, job security, and rising costs. MKC is seeing this not just in the US, but across its key markets.
• MKC addressed tariffs on the call. MKC plans to offset costs related to US import tariffs on China with cost savings and some very targeted price adjustments. MKC's focus remains on safeguarding the health and competitiveness of its brands. In terms of guidance, MKC continues to expect FY25 sales growth of +0-2% (+1-3% CC). Its outlook assumes a gradual recovery, and it expects China consumer sales to improve slightly yr/yr.

Overall, the Q1 results were a bit of a letdown as they continue to reflect a cautious consumer. While it is good for MKC that consumers are eating at home more, they are still value-conscious. Two comments on the call stood out to us: improved QSR growth and China sales are improving slightly. MKC was quite bearish on both counts in Q4, so that was good to see. Also, we view MKC's decision to reaffirm despite the Q1 EPS miss and lackluster sales growth as a positive sign. We think that is why the stock is holding up well.