Consumer goods goliath Unilever (ULVR) warned ‘unprecedented’ inflation is set to accelerate in the second half of 2022 as the Dove soap-to-Domestos bleach maker’s first quarter results revealed better than expected underlying sales growth of 7.3%.
Unfortunately, this growth was entirely driven by price increases of 8.3% and each of Unilever’s three core divisions suffered a drop in quarterly sales volumes as a result, which combined with caution on margins, sent the shares 0.25% lower to £35.69.
INFLATION ESCALATES
Elevated input cost inflation rose further during the first quarter as the conflict in Ukraine impacted global markets and commodities, while Covid-19 continued to affect Unilever’s consumers in countries that have implemented new restrictions and lockdowns.
‘In most of the markets in which we operate, market growth was driven by price which had an impact on volumes,’ conceded the Marmite-to-Magnum ice cream maker.
While Unilever is now forecasting full year sales growth towards the top end of its previously guided 4.5% to 6.5% range, it warned further price increases to offset inflation would impact volumes as cash-strapped shoppers pulled in their horns.
In its outlook statement, the firm said it continued to expect input cost inflation of ‘around €2.1 billion’ in the first half, but war in Ukraine and the related increase in raw material inflation have ‘raised our cost forecast for the second half of 2022. We currently expect input cost inflation for H2 to be around €2.7 billion’.
MARGIN DOWNGRADE
The group underlying operating margin for the first half is expected to be within the previously guided 16% to 17% range, but Unilever now sees the full year underlying operating margin coming in at the bottom end of that range due to soaring costs.
Chief executive Alan Jope, feeling the heat from shareholders following Unilever’s failed bid for GlaxoSmithKline’s (GSK) consumer healthcare business, insisted his charge is ‘executing well in a very challenging input cost environment’ while ‘maintaining strong investment in our top brands. Our priority markets of the USA, India and China all grew competitively. We continue to reshape our portfolio into high growth spaces, with Prestige Beauty and Functional Nutrition again growing strongly.’
THE EXPERT’S VIEW
However, AJ Bell investment director Russ Mould explained: ‘The true definition of a company with pricing power is one which can push up its selling prices without dampening demand. Unilever has managed the first bit but not the second.’
While Unilever talks about another solid quarter of sales growth, ‘pressure on costs means its profit margins aren’t suddenly going to fatten up because people are paying more for a jar of Marmite or a box of Magnum ice creams' added Mould.
‘In fact, it is guiding for operating margins to be at the bottom end of its previously guided range.
‘In the UK, consumers are starting to trade down to supermarkets’ own-label products because they are cheaper. That presents a real threat to Unilever’s earnings in the near-term if people shun its higher priced items. There is a risk this trend spreads to other geographies.
‘The inflationary pressures have taken the spotlight off chief executive Alan Jope for a while, but a resumption of normal trading conditions will inevitably revitalise the debate over whether he is the right man to keep running the business, given poor returns for shareholders under his leadership.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
