Uniliver’s Q2’16 Earnings Review: Bumpy Economic Forecasts Likely To Pose A Challenge Going Forward

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Leading consumer products manufacturer Unilever (NYSE:UL) reported its Q2’16 earnings on July 21st. The company exceeded analyst expectations of underlying sales growth  by 20 basis points mainly owing to its increased market share in all four business segments — Personal, Home, Food, and Refreshment. Despite beating the expectations, the stock fell marginally in US session due to the grim economic outlook given by the company for rest of the year. IMF has reduced the GDP growth rate forecast for 2016 to 3.1% compared to 3.4% in January 2016.

The turnover (i.e., revenue)  fell by 2.6% year over year mainly because of currency drags of 7.1%. Core operating profits and EPS saw a low single digit growth on account of certain margin accretive innovations. The underlying sales and volume growth continued at a strong pace, mainly driven by high volumes from Asia and price increases from Latin America. [1]

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See our complete analysis for Unilever here

Unilever To Rely On Cost Cutting and Improved Efficiency To Safeguard Its Bottomline

Uniliver is focusing on its so-called Connected 4 Growth plan to improve organisational efficiency of its operations. 4G refers to consistent, competitive, profitable and responsible. This initiative is already bearing fruit with increased core operating margins of around 50 basis points and faster growth in market shares across all business segments.

The management has adopted a strategy of ‘Zero Based Budgeting’ to step up the cost cutting initiatives. ZBB involves allocating fresh budget for every task each year without relying on the historical budget data. This along with 4G is likely to save 1 billion pounds per annum for the company by 2018. If it meets this expectation then these initiatives can help in maintaining the ongoing uptrend in operating profits.

Acquisition of Dollar Shave Club Can Be A Game Changer

Unilever announced the acquisition of the men‘s grooming company Dollar Shave Club for $1 billion on 20th with an intention to enter the growing razor market. [2] This has opened a $42 Billion market for Unilever inviting, head on competition from Procter and Gamble.

Dollar Shave Club has 3.2 million customers on a subscription basis who purchase its shaving products through the mail. This model might gain momentum on a large scale if Unilever launches it worldwide. In that case, there can be a major boost to the sales and volumes in its personal care division, once the transaction closes later this year.

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Notes:
  1. Unilever Q2’16 Results, Investor Relations []
  2. Unilever Q2, 2016, Presentation []