Unilever’s Results Show Challenges to Growth
Unilever (NYSE:UL) is the second largest consumer goods company after Procter & Gamble (NYSE:PG). It recently issued its ‘trading statement’ which reports revenue growth across geographies and product segments and it strayed away from issuing its earnings guidance for the first quarter of the current fiscal. We value Unilever with a $35 Trefis price estimate, at roughly 10% premium to its current market price.
Sluggish Volume Growth
While sales grew by 4.3% Q1 2011 compared to the same period last year, the underlying volumes grew by only 2.5% with price increases contributing the remaining 1.8%. Unilever’s Savoury, Dressings & Spreads division, which makes up over 41% of our price estimate, witnessed a 0.4% decline in volumes due to a 2.6% average rise in prices, effectively translating into a 2.1% growth in sales.
Operating Margins
The increase in prices could have been partly absorbed by rising commodity costs, which alleviates our concerns regarding operating margins. We had expected Unilever to raise prices to counter the rising costs of raw materials (see Rising Food Costs Could Strain Unilever’s Grocery Share and Unilever’s Agflation Challenge: To Preserve Margins or Market Share). However, the low volume growth hints at market share losses, which could have a more lasting impact on the business as a whole. Market share losses due to lower-priced substitutes typically take longer to regain than the economic recovery, as consumers who experience acceptable quality at reduced prices do not revert back to premium brands easily.
Western Europe Disappoints
While emerging markets have grown in double-digit growth rates in spite of negligible price increases to the tune of barely 0.1%, volumes tanked by a significant 2.8% leading to a 2.7% decline in Unilever’s sales in the region.
Here again, the acquisition of Sara Lee’s personal care and European fabric care business contributed to a 4.4% growth in Western Europe sales, which was more than compensated by a 5.7% decline partly on account of Sanex brand’s divestiture to Colgate-Palmolive (see Unilever’s European Expansion Lifts Stock and Unilever Sells Sanex To Colgate To Shed Weight Post Sara Lee Deal).