Unilever Earnings: Personal Care And Emerging Market Growth In Focus

Unilever (NYSE:UL) is scheduled to report its third quarter earnings on October 25. The Anglo-Dutch consumer products giant had a good second quarter with underlying sales growth of 5.8% y-o-y, driven by overall volume and pricing gains of 2.2% and 3.5% respectively. The company is currently going through a transition with a number of acquisitions and divestitures, including the purchase of Russian personal care company Concern Kalina and the sale of its North American frozen meals business to ConAgra foods. It is also looking to sell Skippy, its North American business, in a bid to focus on higher growth product segments and emerging markets such as India and Russia.

See our full analysis for Unilever

Growing Personal Care business

The personal care business has seen strong results lately. The hair segment enjoyed double digit growth last quarter, driven by the strong performance of Dove and Clear. The company has increased its focus on personal care, building on a strategy based on innovation, acquisitions and aggressive expansion into new country/category combinations, as seen with the launch of Clear in the United States, Tresemmé in Brazil and Dove Hair Care in Philippines. It has also seen strong growth in Russia following the purchase of Concern Kalina.

The company sees India as a key emerging market to drive growth in personal care. It is expanding the Lux brand into the deodorant segment and is planning to build a new deodorant manufacturing facility in the country. It has also drawn out plans to develop its premium male deodorant brand Axe into a comprehensive male grooming portfolio, covering deodorants, soaps, body wash, shaving cream, talcum powder and cologne for men. Axe already had presence in shaving cream, talcum powder and cologne segments and is now extended to soap and body wash categories.

Building on the success of Magnum

Unilever is a well established player in the global ice cream market with a strong brand portfolio which includes household names such as Walls, Cornetto and Ben & Jerry’s. In a bid to compete with market leader Nestle, the company is targeting a large scale expansion of Magnum, its premium ice cream brand.

Magnum was launched in Indonesia in 2010 and has enjoyed phenomenal success in the country. With a base price of 10,000 IDR (around $1), the ice cream was launched as a premium product, and it has exceeded all expectations by becoming one of the best selling ice cream brands in the country.

Following the launch of the brand in Indonesia, the company rolled out Magnum in the U.S. in 2011. The brand has performed incredibly well in this market as well with sales of $100 million in the first year. It continued the brand’s expansion with a launch in Philippines during the first half of 2012.

Magnum is now sold in over 50 countries worldwide and the company is spending a significant chunk of its marketing and advertising expenses on the product. Global brand sales are expected to top €1 billion ($1.3 billion) this year, well over 10% of the company’s total revenues from ice cream.

Adapting to economic conditions in Europe

The deteriorating macroeconomic conditions in Europe have led to a shift in consumer spending trends in the continent. Consumer goods companies have seen an unfavorable change in the mix of products sold, with a larger proportion of customers going for products priced in the lower range.

As consumers transform their shopping habits amid the financial crisis that has left Greece stalled in recession for the past five years, Unilever has already started to change the way it sells some of its products, applying some of the strategies it uses in the emerging markets. For example in Spain, which is reeling under the effects of a 25% unemployment rate, the company is selling Surf detergent in packages for as few as five washes.

Revenue from European countries grew by just 0.2% in Q2 compared to a growth of close to 16% in Asia and other emerging economies. We believe that this modified strategy could help prevent a steep decline in the company’s European revenues going forward.

We currently have a Trefis price estimate of $37 for Unilever, which is in line with the market price.

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