McCormick's Q3 2025: Contradictions Emerge on Tariff Offset Plans, Pricing Strategy, and Volume Growth

The above is the analysis of the conflicting points in this earnings call

Date of Call: October 7, 2025

Financials Results

• Revenue: Organic net sales up 2% YOY; Consumer +3% (Americas +3% volume, EMEA +4% with +1% volume/+3% price, APAC -1% on China foodservice), Flavor Solutions +1% (Americas +1% price/-1% volume, EMEA -3% with -2% price/-1% volume, APAC +6% with +9% volume/-3% price)
• EPS: $0.85 adjusted EPS, up 2% YOY
• Gross Margin: Adjusted gross profit margin down 120 bps YOY due to higher commodity costs, tariffs, and capacity investments; Q4 expected to improve sequentially

Guidance:

• FY25 organic net sales growth 1%-3%; expect at least the midpoint; growth volume-led.
• Consumer drives growth; Flavor Solutions roughly flat for the year.
• FY25 adjusted operating income growth 3%-5% in constant currency (from 4%-6%).
• FY25 adjusted EPS now $3.00–$3.05 (prior $3.03–$3.08); constant-currency EPS growth 4%-6% (prior 5%-7%).
• FY25 gross margin now flat (prior flat to +50 bps); Q4 GM to improve with mitigation; tariff pricing mostly in Q4.
• Inflation ex-tariffs now low-to-mid single digits (prior low single digits).
• FY25 tax rate ~22% (vs 20.5% in 2024).
• China Consumer to improve slightly YOY; gradual recovery assumed.
• 2025 gross tariff costs ≈$70M; annualized exposure ≈$140M; most 2025 impact offset; 2026 mitigations via productivity, sourcing, targeted pricing.

Business Commentary:

• Volume-Led Growth and Consumer Trends:
• McCormick reported 2% organic sales growth for Q3, driven by volume growth, primarily in the Consumer segment.
• The growth was sustained despite a challenging economic environment, with consumers adapting by increasing less frequent shopping trips and favoring larger pack sizes.

• Health and wellness trends, along with consumer demand for flavor exploration, continue to benefit the Consumer and Flavor Solutions segments.

• Renewed Focus on Health and Wellness:

• McCormick is benefiting from an increase in reformulation projects, particularly with large CPG customers, driven by consumer demand for healthier products.
• The company is leveraging its expertise to support customers in navigating regulatory environments and meeting consumer needs for health and wellness.

• This trend is evident in the increased win rate in health and wellness-related briefs across regions.

• Tariff Impact and Cost Management:

• McCormick's current gross tariff costs for 2025 are now expected to be approximately $70 million, up from $50 million previously, impacting adjusted gross margin.
• The company is working to offset these costs through productivity savings, alternative sourcing, and surgical pricing strategies.

• Despite these challenges, McCormick aims to balance volume and profitability while sustaining investments in growth initiatives.

• International Market Expansion:

• Despite softer demand in China's foodservice business, McCormick's China retail business continued to deliver growth.
• Diversification into high-growth channels and expanding distribution are key strategies to mitigate risks from market fluctuations.
• The company anticipates a gradual full-year recovery in China Consumer for 2025, supported by distribution growth and strategic planning.

Sentiment Analysis:

• Sales grew 2% organically and adjusted EPS rose 2%, but gross margin fell 120 bps on higher commodities and tariffs, and guidance for AOI and EPS was trimmed. Management maintained net sales outlook (1%-3%, midpoint or better) and expects Q4 gross margin improvement, while flagging 2025 tariff costs of ~$70M and annualized exposure of ~$140M.

Q&A:

• Question from Andrew Lazar (Barclays): With tariff-driven pricing in Q4, what gives confidence Consumer volumes will remain positive and how are elasticities trending so far?
  Response: Management expects positive Q4 volume, using surgical RGM-led pricing, higher A&P, innovation, distribution gains, and holiday plans; early elasticity read is limited but approach focuses on preserving affordability and volume momentum.

• Question from Peter Galbo (BofA Securities): What drove the higher inflation (ex-tariffs) and how should we think about Q4 gross margin cadence?
  Response: Q3 GM -120 bps was ~2/3 commodities/tariffs and ~1/3 capacity costs (heat platform), with broader input inflation (incl. packaging); Q4 GM expected flat to modestly up YoY to deliver flat FY GM.

• Question from Thomas Palmer (JPMorgan): Are earlier tariff rounds fully offset and why did Q3 margins weaken so quickly if new tariffs hit in August?
  Response: They aimed to offset most 2025 tariff impact but did not commit for 2026; Q3 pressure was mainly accelerated commodity inflation, with only some effect from new August tariffs—more tariff impact/mitigation flows in Q4.

• Question from Alexia Howard (Bernstein): Where are reformulation wins coming from and will retailer initiatives (e.g., additive removals) accelerate activity?
  Response: Wins skew to high-growth innovators and private label; reformulations focus on natural colors, reduced sugar/salt, and removing ingredients of concern; activity is rising but major projects have longer validation timelines.

• Question from Robert Moskow (TD Cowen): How will you balance volume-led growth with the need for pricing to offset rising costs?
  Response: They will balance long-term volume momentum with selective pricing and productivity; target positive volumes in 2026, accept not all cost may be offset, and align with retailers to sustain affordability.

• Question from Max Andrew Gumport (BNP Paribas Exane): Why do Consumer Americas results outpace decelerating U.S. scanner data?
  Response: Growth is stronger in unmeasured channels (e-commerce, club) and Canada; e-commerce is accelerating and expanding as a share of sales, explaining divergence from scanner reads.

• Question from Stephen Robert Powers (Deutsche Bank): What are early elasticity learnings on tariff pricing and how will 2026 mitigations balance pricing vs savings?
  Response: Elasticity read is too early; plans rely on robust analytics. 2026 mitigation will be skewed toward productivity/CCI and alternative sourcing, with residual needs covered by surgical pricing.

• Question from Scott Marks (Jefferies): What underpins confidence in a gradual China recovery given foodservice softness?
  Response: High-end dining softness was offset by shifting to value channels; they’re diversifying, expanding small-format retail distribution, lapping easier comps, and expect slight YoY improvement in China Consumer.

• Question from Bryan Adams (UBS): What drives the expected Q4 topline step-up versus Q3?
  Response: Q4 growth aligns with full-year midpoint: Consumer benefits from volume plus pricing; Flavor Solutions flat volumes with pricing; APAC easier comps help, with tariff-related pricing flowing through.