Shares in Reckitt Benckiser (RKT) were the FTSE 100’s biggest risers on Thursday, rallying 5.2% to £61.11 after fourth quarter sales beat forecasts and the consumer and household goods giant guided for improved margins in 2022.
The Dettol-to-Durex maker’s upbeat margin guidance in the face of inflationary pressures was in stark contrast to Unilever (ULVR), which recently warned that its margins could fall in the near-term, implying it would struggle to pass on all of its rising costs to increasingly cash-strapped customers.
TARGETING MARGIN GROWTH
For 2022, Strepsils, Lemsip and Lysol seller Reckitt said it is targeting growth in adjusted operating margins ‘from our base of 22.9%’ despite facing ‘significant commodity inflationary pressures’, news which came as a relief to investors.
Danni Hewson, financial analyst at AJ Bell, explained: ‘Part of the expected margin boost for Reckitt comes from a likely shift in the type of products being sold in its health arm.
‘During the pandemic, people stuck at home haven’t caught as many colds or flu-like illness because they haven’t been mixing in public as much. But now life is getting back to normal, Reckitt is likely to see stronger sales of higher-margins products to help fight colds and flu.’
Led by chief executive Laxman Narasimhan, Reckitt is also targeting like-for-like net revenue growth of between 1% and 4% this year after revenues on the same basis rose 3.3% in the final quarter of 2021.
That was ahead of the 1.9% growth called for by consensus as the health business saw bumper growth with a boost from a strong start to the flu season.
For 2021 as a whole, Reckitt’s like-for-like net revenue grew 3.5% to more than £13.2 billion, though this was mostly a result of pushing up prices rather than greater sales volumes.
Performance was driven by strong growth in hygiene product sales, particularly in North America, with Lysol disinfectant generating good growth off the back of a Covid-boosted 2020.
Last year, Reckitt Benckiser actually lurched from a £2.16 billion profit to an operating loss of £804 million, though this largely reflected the loss related to the strategic review and disposal of its struggling infant nutrition business in its China.
BIG BRANDS UNDER PRESSURE
‘Big brand owners are facing an important test given pressures on the cost of living’, added Hewson.
‘Consumers may not be able to keep stomaching price increases and so there is a risk they buy less of the popular and more expensive brands and/or trade down to cheaper options. The big brand companies therefore face the risk of having to cut their prices just to maintain sales volumes.’
Nevertheless, Narasimhan sounded optimistic about the future for his charge. ‘Our journey to rejuvenate sustainable growth is well on track as evidenced by strong like-for-like growth of 3.5% in 2021, building on the outstanding growth in 2020, for a two-year stack of 17.4%,’ he explained.
‘Over the last two years, we’ve significantly strengthened our business. Our innovation pipeline is 50% larger, our brands are stronger and more relevant, and our ability to serve our customers and consumers is greatly improved.’
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.
