In the past few quarters, currency devaluation in many developing countries has created inflationary pressures on buyers who in turn have reduced their consumption. Unilever (NYSE:UL) registered 3.7% growth in underlying sales (sales from continuing operations excluding acquisitions, disposals and currency movements) in the first half of fiscal year 2014, lower compared to 4.3% growth achieved in 2013 due to the slowing growth in the emerging markets. Currency headwinds further had a 8.5% negative impact on the company’s revenue, which fell by 5.5% to EUR 24.1 billion ($33 billion) due to foreign exchange losses. 
Unilever’s focus on saving costs and developing higher margin products helped the company to increase its gross margin for H1 by 10bps to 41.5%. The company saved about €1.5 billion (less than $2 billion) through its cost savings program in 2013. Starting next year, the company expects to save an incremental €500 million ($684 million) annually. This is will be achieved via a combination of measures such as reduction in marketing headcount by 12% globally (mostly in slow growing economies such as the U.S.) and a 30% cut in the number of stock keeping units by the end of this year. The company will also focus on launching more high-margin products in the market to generate higher levels of income. We believe these initiatives will help the company to post further expansion in gross margins. 
We are in the process of updating our $44 price estimate for Unilever’s stock, based on the recently announced results.
Home And Personal Care Most Impacted By Currency Woes
Unilever achieves the majority of its overall growth from developing economies such as Brazil, Argentina, India, Indonesia, and South Africa. These markets witnessed their currencies depreciate rapidly in the second half of 2013, thus creating an inflationary environment and forcing consumers to reduce buying activity. As a result, Unilever’s underlying sales growth in the emerging markets decelerated to 6.6% year-on-year in H1 2014 from 8.7% in 2013. 
“Our markets have been challenging and we have experienced a further slow-down in the emerging countries whilst developed markets are not yet picking up.”— Paul Polman, CEO of Unilever
In line with our expectations, Unilever’s home and personal care divisions were most affected by the slowdown. These two categories together generate about 80% of Unilever’s emerging market sales, and hence are most prone to emerging market volatility. H1 underlying sales growth in home care decelerated to 6.8% from 8% in 2013 while that of personal care fell to 4.5% from 7.3%, contemporaneously. 
Towards the end of 2013, Mr. Polman warned the market that the emerging markets slowdown will stay for a long period due to the lack of economic reforms.  We expect the company’s growth in home and personal care to remain subdued amid a prolonged emerging market slowdown. Also, the company intends to raise prices in the developing countries to counter commodity cost inflation which could further weigh on the demand.  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.
Foods Business On Track To Recovery, Will Take Some Time To 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 are 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) is 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 time frame. 
Unilever is working to improve the taste profiles and naturalness of its products by responding to consumer feedback. The company is trying to market margarine as a healthier yet great tasting alternative to butter. It has also divested many of its non-core brands such as Ragu sauce, Bertolli, Wishbone and Skippy in order to increase its focus on spreads. All this helped the company to grow its market share in margarines in the first half of 2014. Despite this, underlying sales at the foods division fell by 0.5% owing to the declining market for margarines. We believe that Unilever’s market share in margarines 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 is a challenge the Anglo-Dutch consumer goods company is confronting, and that is why investors must be patient while expecting a turnaround in foods.Notes:
- 2014 First Half Year Results, Unilever Earnings Release, July 2014 [↩] [↩] [↩]
- Unilever Plans To Cut 800 Marketers As It Slashes Agency Fees, Products, Advertising Age, December 2013 [↩]
- Unilever CEO Says Emerging Market Slowdown to Last for Years, Bloomberg, December 2013 [↩]
- Unilever Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 [↩]
- Butter’s Back — Sales Rise as Consumers Seek Pure Ingredients, Advertising Age, June 2012 [↩]