McCormick booked a $28 million refund on IEEPA tariffs it paid in earlier quarters, and plans to spend the money on higher freight and ingredient costs instead of letting it flow to earnings.
The timing is the whole story. The refund arrived just as the Iran war and disruption around the Strait of Hormuz drove up ocean freight and ingredient prices, so McCormick is using the refund to offset those higher prices.
The numbers: The refund cut the cost of goods sold by $28 million, added about $0.07 to adjusted earnings of $0.80 a share, and lifted gross margin roughly 140 basis points.
McCormick expects about $3 million more in the second half. That would bring the full-year total to about $31 million. CFO Marcos Gabriel said cost inflation is now running close to 6%, the high end of its guidance.
“We are going to use the majority of the tax refund to offset these higher costs,” Gabriel said on the earnings call.
Why McCormick is exposed to shipping: McCormick sources thousands of ingredients from 80 countries, and it says many have no commercially viable US source.
Its costs ride on ocean freight out of South and Southeast Asia and through the Gulf. When that corridor tightens, the cost of ingredients rises. McCormick cannot move production closer to home to dodge either the tariffs or the freight spike. That is why an incoming refund is now paying for a higher freight bill.
How others used the refund: The IEEPA refunds reached several companies this earnings season, and each spent the money differently.
Nike booked a $986 million refund straight to earnings
FedEx is returning about $800 million to shippers
BJ's Wholesale cut member prices
Deere took a $272 million refund but still carries about $900 million in net tariff cost
What's next: The refund does not end McCormick’s exposure. The company still faces a 10% tariff under Section 122 that is under appeal. Its plan also assumes freight stays elevated through the rest of the year.
