Shares of Unilever N.V. (UN - Analyst Report) declined 2.72% in after-hours trading on Oct 13 after the company posted weak third-quarter 2016 results.
In the third quarter, Unilever’s sales fell 0.1% mainly due to currency headwinds and weak economic conditions in a number of countries. On a constant currency basis, sales increased 3.4% in the quarter. Unilever delivered organic sales growth of 3.2% (in local currency), which was toward the lower end of the 3%−5% range expected for the year. Higher pricing of 3.6% offset the volume decline of 0.4%. Organic sales growth was lower than 4.7% growth in the preceding quarter.
Emerging markets grew 5.6% in the third quarter of 2016, weaker than 7.7% growth in the second quarter and 8.3% in the first quarter. Many emerging markets continued to remain weak and volumes have also slowed down, particularly in Latin America where currency devaluation has pushed up consumers’ cost of living, squeezing disposable incomes.
The Asian markets were weak in the quarter. In India, consumer demand in skin cleansing was dampened by rising commodity costs, while in China, sales were down due to intense price competition from local brands in laundry and a rapid channel shift to e-commerce.
Encouragingly, Philippines delivered double-digit growth in the reported quarter, while Turkey and South Africa recorded price-led growth. The company also witnessed improvement in North America and Latin America, despite a highly competitive environment. However, European markets remained challenging with subdued volume growth and continued price deflation in many countries.
Developed markets remained flat in the quarter as against 0.7% growth in the preceding quarter owing to weak volume growth and price deflation in Europe.
The company witnessed sales growth as well as improved pricing in all the categories of Personal Care, Refreshment, Home Care and Foods. Except Refreshments, volumes declined in all the other categories.
Overall, we are encouraged by the fact that Unilever is consistently focusing on improving its products through innovation. While the company is introducing new products in some markets, it is re-launching some of its products with improvements in the existing markets. Unilever has also accelerated its cost containment measures to remove unnecessary costs and simplify the business.
The company has been relying on deodorants and hair-care products to augment revenues this year, amid waning sales of its margarine and bread spreads. It also added personal care and other consumer brands, including Dermalogica and Kate Somervile, and the Zest soap brands, last year. In fact, the company entered into many deals recently in order to fortify its position in home care and personal care products. These acquisitions will strengthen the company’s portfolio and add to its revenues.
Apart from acquisitions, Unilever has also been shedding off assets in its battered food business. The category has been delivering sluggish growth due to lack of innovation and declining demand. Demand has been weak owing to saturated markets in the U.S. – the company’s major revenue source.
Also, the company still remains concerned about deteriorating trends in Europe, Brazil and Russia. Weakness in consumer demand persists. Many emerging markets continue to be volatile, particularly those dependent on oil and other commodity exports, and where currency devaluation is pushing up the cost of living for consumers.
Unilever has a Zacks Rank #3 (Hold).
Some well-positioned consumer staples companies include The Kraft Heinz Company (KHC - Analyst Report) , Colgate-Palmolive Co. (CL - Analyst Report) and The Clorox Company (CLX - Analyst Report) .
Kraft Heinz has an average positive earnings surprise of 5.22% in the trailing four quarters with a long-term earnings growth rate of 19.54%. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
While Colgate-Palmolive has a long-term earnings growth rate of 7.86%, Clorox has a long-term earnings growth rate of 7.63%.
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