Unilever (NYSE:UL), the manufacturer of popular brands like Dove, Knorr and Lipton, ended 2013 with a robust 4.3% year-over-year increase in underlying sales (sales from continuing operations excluding acquisitions, disposals and currency movements) despite slowing growth in the emerging markets. The company’s home and personal care segments led the growth with underlying sales higher by 8.0% and 7.3% respectively. The foods and refreshments businesses pulled back overall growth since these segments grew merely by by 0.3% and 1.1%, respectively. Geographically, while emerging market growth stood at 8.4%, developed markets registered a decline of 1.7%. 
Despite the remarkable increase in underlying sales, Unilever’s revenue declined by 3% year-over-year to €49.8 billion ($66.1 billion), primarily due to currency devaluation in some of the emerging markets. Gross margin increased 110 basis points to 41.2% helped by margin accretive innovation, disposal of low gross margin businesses, and cost savings. The gross margin expansion allowed Unilever to increase brand support by upping its advertising and promotional spend. 
Home And Personal Care Outperform Despite Slowdown And High Competition In Emerging Markets
Unilever registered 4.1% year-over-year increase in underlying sales for the fourth quarter of 2013, a tad lower than its full year growth figure. This was due to weak emerging market demand in the latter half of the year, which resulted from currency depreciation and inflationary pressures on consumers. High pricing and promotional activity by competitors to increase their sales in the slowing market also impacted Unilever’s growth.
Home and personal care segments, which are more exposed to the developing economies, continued to experience strong growth in Q4 despite these headwinds. While home care posted 6.5% year-over-year growth in underlying sales, personal care underlying sales rose by 7.3%. This was fueled by innovations, product launches, entry into new markets and overall market growth. 
Driven by rising disposable incomes, emerging markets are expected to continue growing, albeit at a slower pace due to currency weaknesses and lack of economic reforms. Going forward, we expect this to cause deceleration in home and personal care businesses. However, we also believe that these businesses will grow faster than others as emerging market growth is expected to outpace growth in the developed world.
Foods Shows Early Signs Of Recovery From Margarine Woes
After posting a decline in Q3, the foods segment registered 1% year-over-year underlying sales growth in Q4. The business had been suffering particularly due to the sluggish performance of spreads, which generate close to 7% of Unilever’s total revenue. Margarine is a heavyweight in Unilever’s spreads portfolio, but health concerns over the presence of trans fats in margarine was leading many consumers to shift back to butter and other healthier alternatives. The market for margarine has been declining as a result.
In the last few quarters, Unilever divested many of its non-core food brands to increase its focus on driving growth in core products such as margarine. The company worked to efficiently market margarine as a healthier but still a great tasting alternative to butter. Unilever also improved the taste profiles and the naturalness of its products by incorporating consumer feedback. This helped it to grow market shares in margarine in 11 of its top 14 markets. We believe that Unilever’s market share in margarine, and also its market share in spreads, will continue to grow as the company ramps up its efforts to establish a stronger foothold in the market. However, driving market growth in the margarine category is a challenge the company will have to confront.
- Underlying sales growth: 3%–5%
- Foreign exchange impact on revenues: negative 5%
- Capex: 4%–4.5% of revenue
- Commodity cost inflation: Low to mid-single digit
- Pricing environment: Flat to down in developed regions; Increases expected in emerging regions
We are in the process of updating our $40 price estimate for Unilever’s stock based on the results for the complete fiscal year 2013.Notes: