Currency Woes Could Lower Unilever’s Sales Growth

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Unilever (NYSE:UL) will be announcing its results for Q1 FY 2014 on Thursday, April 24. The Anglo-Dutch consumer goods company ended 2013 with a robust 4.1% year-over-year increase in fourth quarter underlying sales (sales from continuing operations excluding acquisitions, disposals and currency movements). Emerging markets led the growth with a 8.4% increase in underlying sales. However, this growth rate was lower than that achieved in prior quarters due to currency devaluation in many developing countries that caused inflationary pressures, which in turn weighed on the demand.

The unfavorable exchange rates had a negative impact on Unilever’s top-line as well which declined by 6% to €11.8 billion ($16.1 billion). [1] We expect a similar impact on Q1 results since emerging market currencies are still on a low relative to the dollar. To better understand how currency depreciation impacts consumer staples firms in the long-run, read our article How Will A Prolonged Slowdown Affect FMCG Stocks?

See our complete analysis of Unilever

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Home & Personal Care To Be Most Impacted By Currency Woes

Unilever’s home and personal care categories together generate about 80% of its emerging market sales, and hence are most prone to volatility in these regions. Fueled by innovation, product launches, entry into new markets and overall market growth, home and personal care experienced strong growth in Q4 despite currency headwinds. While home care posted 6.5% year-over-year growth in underlying sales, personal care underlying sales rose by 7.3%. [1]

Driven by rising disposable incomes, emerging markets are expected to continue growing, albeit at a slower pace due to currency weakness and lack of economic reforms. Going forward, we expect this to cause some deceleration in home and personal care sales growth. However, we also believe that these businesses will grow faster than others as emerging markets growth is expected to outpace growth in the developed world.

Will The Foods Division Regain Momentum?

Unilever’s foods business has been suffering due to the sluggish performance of spreads, which generate close to 7% of the company’s total revenue. High promotional activity and pricing competition in developed economies were causing consumers to switch to private label spreads manufacturers. Additionally, health concerns over the presence of trans-fat in margarines (an important spreads category for Unilever) was leading consumers to shift back to butter and other healthier alternatives. Euromonitor expects retail volumes for margarines in the U.S. to decline annually by approximately 5% over the 2011–2016 timeframe. [2]

In the last few quarters, Unilever improved the taste profiles and naturalness of its products by incorporating consumer feedback. The company worked to efficiently market margarine as a healthier yet great tasting alternative to butter. It also divested many of its non-core brands such as Ragu sauce in order to increase its focus on spreads. This helped it to grow its market share in margarine in 11 of its top 14 markets in Q4 2013. The foods segment registered 1% year-over-year underlying sales growth in Q4 after increasing by only 0.1% in the first nine months of the year. [3]

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 itself will be a challenge for the company.

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Notes:
  1. 2013 Full Year And Fourth Quarter Results, Unilever Investor Relations Website, January 2014 [] []
  2. Butter’s Back — Sales Rise as Consumers Seek Pure Ingredients, Ad Age, June 26, 2012 []
  3. Unilever Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 2014 []