Unilever (NYSE:UL) releases earnings this Thursday, and we will look for volume growth metrics and pricing trends, especially in North America and Europe. Last quarter, Unilever’s volume growth slowed in the U.S. and turned even negative in Western Europe, making the company’s top-line dependent on its pricing mix and emerging market sales. As pricing efforts mitigated input cost pressures, Unilever expects operating margin in fiscal 2011 to be flat to slightly down compared to last year. Unilever is the second largest consumer goods company in the world after Procter & Gamble (NYSE:PG).
Overall Volume Growth Slow, Emerging Markets Save The Day
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Given the slowed market demand and cost-induced pricing in North America and Western Europe, Unilever’s volume growth had slowed to 2% over the first three quarters of 2011. The majority of its sales growth was driven by emerging markets whose sales soared by 13% even as developed markets slowed down to 2% and West European volumes dipped by 3%. Earnings will provide an update on the volume trends of the Europe-based consumers giant last quarter, especially among the anxious European consumers.
Focus on Personal Care Segment
Unilever’s Personal Care business that includes Dove, Lux Skin & Hair Care and Deodorants Division – that together contribute to more than 40% of the stock price – has been performing well. especially compared to the food business. These units combined for 11% growth last quarter and 5% over the first six months of FY 2011, with a robust 6% volume growth in the category led by Dove.
With better growth prospects, Unilever has been offloading some of its low-growth food businesses to rationalize its resources towards its fast-growing personal care business, particularly in the emerging markets. Recent examples were – sale of its Culver Specialty Brands to B&G Foods, sale of its tomato products business in Brazil, acquisition of U.S. haircare business Albert Culver, TIGI, and Concern Kalina in Russia.
Operating margin trends
The upcoming earnings would also give an update on the operating margin trends. The high input cost inflation in 2011 led to a 230 bps decline in gross margin and a 20 bps decline in operating margin during the first six months of fiscal 2011. With some moderation in commodity prices in later half of 2011 and about 5% pricing so-far this year, Unilever is likely post flat to slightly down operating margin this year compared to last year.
We value Unilever with a $32 Trefis price estimate of its stock roughly in line with its current market price.