Unilever (NYSE:UL) is slated to release its Q4 and full year 2013 results Tuesday, January 21. The consumer staples firm faced a tough Q3 due to currency depreciation in the emerging markets that caused growth rates to slow. Negatively affected by the slowdown, Unilever’s underlying sales (sales from continuing operations excluding acquisitions, disposals and currency movements) in the emerging markets rose by only 5.9% year-over-year in Q3, the worst in ten quarters. Overall underlying sales rose by 3.2% year over year in the quarter, lower than 5% growth achieved in the first half of 2013. The exchange rate impact of the currency headwinds also hampered revenues, which declined by 6.5% year over year to €12.5 billion ($16.5 billion). (Read: Emerging Markets Hold Back Unilever’s Growth)
The Q3 results came as no surprise to investors as the company’s CEO, Mr. Paul Polman, had warned the market of a slowdown well before the earnings announcement. However, Mr. Polman was upbeat about the company’s performance in Q4 and the complete fiscal year at that time. In December, Mr. Polman stated at the 2013 World Wildlife Fund Duke of Edinburgh Conservation Awards that the slowdown in the developing world was here to stay for a longer period than he had anticipated, suggesting that operating conditions were tough in Q4 as well.
We think that Unilever’s home and personal care businesses will be most affected from the slowdown since these divisions have maximum exposure to the developing markets. We still remain positive about the prospects for the two divisions as the emerging markets are expected to continue to grow faster than the developed ones.
Our price estimate of $40 for Unilever’s stock is almost in line with its market price.
Growth in Personal and Home Care Divisions Will Be Most Impacted
Unilever achieves about 85% of its overall growth from developing economies such as Brazil, India, Indonesia and South Africa. Rapid currency depreciation in these markets has created inflationary pressures on consumers, who have cut down on buying activity. Unilever’s home and personal care categories together generate about 80% of its emerging market sales, and hence are most prone to emerging market volatility. Despite the sluggish growth in emerging market demand, the two divisions outperformed other divisions in Q3 with year-on-year underlying sales growth of approximately 6%. This growth rate, however, was lower than that achieved in the first half of the year.
Driven by rising disposable incomes the emerging markets are expected to continue growing, albeit at a slower pace due to currency weaknesses and lack of economic reforms. We believe that Unilever’s growth in home and personal care will further decelerate amid a prolonged emerging market slowdown. Despite the deceleration, we think that these categories will grow faster than others as emerging market growth is expected to outpace growth in the developed world.
Pressure On Foods Business To Stay In The Near Term
Unilever’s food division has been suffering due to sluggish performance of its spreads business. High promotional activity and pricing competition in the developed economies is making consumers switch to private label spreads manufacturers. Spreads are an important part of Unilever’s overall portfolio and account for 7% of its total revenue.
Underlying sales of the food division increased by only 0.1% year over year in the first nine months of 2013.  However, Unilever is working to improve the taste profiles and the naturalness of its products by incorporating consumer feedback. In addition, the company is disposing non-core and low margin brands in order to focus on its core brands.
Unilever launched two new spreads with simple ingredients and zero trans fat during the fourth quarter in the U.S. It also launched its biggest marketing investment into the Flora brand across Ireland and the U.K. The brand generated over €13 million ($16.7 million) in revenues in 2012.  We believe that Unilever can turnaround its food business with its efforts to reinvigorate the spreads category.Notes:
- Unilever Trading Statement Third Quarter 2013, Unilever Investor Relations, Jul-Sept 2013 [↩]
- Unilever launches biggest Flora marketing campaign to date in Ireland and UK, Business & Leadership, November 15, 2013 [↩]