Unilever (NYSE:UL) is due to announce its Q1 results April 26. The consumer giant’s struggles with high input costs, sluggish market demand and flat volumes, particularly in developed markets, continued in 2011 but were partially mitigated through pricing actions and savings initiatives. This quarter we will watch for improvements in demand, especially in North America and Europe. Additionally, with mixed expectations around the global commodity cost environment this year, we will keep an eye on Unilever’s margins, particularly for its food businesses. Unilever is the second largest consumer goods company in the world after Procter & Gamble (NYSE:PG).
Margin Weakened With Substantial Cost Inflation in 2011, Trend Likely To Continue
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Unilever’s sales volume growth further slowed last quarter, reflecting weak consumer confidence and some market share loss due to increased prices resulting from higher commodity cost inflation. While volumes declined in North American and European markets, growth from emerging markets was also moderate compared to its previous levels. The substantial inflationary environment led the company to end the year with an operating margin decline despite strong pricing and savings, even though it began 2011 targeting margin expansion. In fiscal 2011, Unilever absorbed €2.4 billion of commodity inflation and while this figure should go down in 2012, it is still expected to be meaningful.
Strong Growth in Personal Care Segment
At odds with Unilever’s overall weak performance, its personal care segment performed quite well last year. It ended 2011 with higher market share and stable margins with volume growth led by the expansion of Vaseline, Dove, Lifebuoy, Axe and Lux brands as well as the recently acquired Sara Lee’s personal care business in Europe, Alberto Culver in the U.S., and Concern Kalina in Russia. The segment includes skin care, hair care, oral care & deodorants and contributes to more than 40% of its stock price.
Food Businesses Could Suffer More If Costs Don’t Ease
The commodity inflation was particularly challenging for Unilever’s food businesses. Moody forecasts that while global food commodity inflation could ease in 2012, prices for several commodities remain at historical highs. The report noted that while passing on costs to the customers cushioned the food & beverage companies in 2011, weak demand, particularly in Unilever’s core European markets, might make it difficult to continue do so in the future and margins could contract if input costs rise again. With this mixed outlook, Unilever’s food businesses could suffer more in 2012.
With no respite in cost environment, Unilever’s biggest rival P&G has announced plans to reduce costs by $10 billion by 2016 in order to push its margins up and improve flexibility in emerging markets, which could make things further challenging for Unilever.
We value Unilever with a $32.30 Trefis price estimate of its stock, at 4% discount to the current market price.