Brexit And High Commodity Prices Weigh On Unilever’s Q3 Results
The Europe based consumer goods heavyweight Unilever (NYSE:UL) released its Q3’16 earnings on October 13th and reported flat turnover with a marginal volume decline. Although organic sales increased by low single digits, growth has slowed sequentially for the fifth consecutive quarter. In fact, the organic growth in the personal care, home care and refreshment segments has almost halved in comparison to what it achieved last year during the same period. The stock fell modestly on Thursday after earnings disappointed the market. Increase in import prices due to weak sterling, high commodity prices and low consumer confidence in emerging markets turned out to be the main culprits for the middling results.
Going forward, the company will have to report more than €13.7 billion turnover in Q4 just to reach achieve last year’s total revenue. Yet Unilever typically experiences lower Q4 revenues due to the seasonality of its food businesses. Moreover, global economic conditions and the currency situation are unlikely to change in this quarter. As a result, we believe that the full year revenue comparison for 2016 will be flat.
See our complete analysis for Unilever here
The Brexit Impact:
It is the first quarter after Brexit vote and Unilever has already emerged as a casualty. More than 15% decline in sterling (GBP/USD) post Brexit is resulting in higher costs of imported commodities, which in turn is putting pressure on Unilever to increase the prices of its products. This has caused a concern as Unilever was already struggling to keep up its volumes growth in Europe due to tough competition and low demand. The company had adopted the strategy of price deflation in Europe to keep the volumes growing. However, in case they have to increase the prices in the region, there can be a significant impact to its volumes from Europe. The effect of this was visible recently when the retail giant Tesco removed most of the Unilever’s products from its shelves as the latter wanted a 10% hike in the prices [1]. Though the issue has been resolved, but any such event in the future can add to Unilever’s plight.
Latin America Continues To Pose Problems:
Just over half of Unilever’s sales come from emerging markets. Recently these markets have shown low consumer confidence as the consumer demand in last quarter decreased by 10% and 7% in Brazil and Argentina, respectively. [2] So, unlike in Europe, the company relies on high prices for sales growth in Latin America, which has been offset by the negative volume growth in the region.
High Commodity Prices Likely To Continue
The prices of commodities like palm oil and crude oil have experienced a sudden jump in 2016. Crude oil has started trading above $50 a barrel from its lows of around $26 per barrel in January. The rise in crude oil prices might continue as EIA said that it expects higher demand for the commodity in the near future. Also, according to the commitment of traders (COT) data, the commercials such as producers, hedgers and physical traders have reduced their short positions in crude oil, which is usually indicative of a bullish environment in any commodity. Therefore, under such circumstances, Unilever might continue to experience problems with commodity prices.
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