Shares in consumer health and hygiene company Reckitt Benckiser (RB.) fell 5.2% to a three-month low of £55.68 after it lowered its full-year revenue growth and operating margin forecast for the second time.

After a ‘disappointing’ third quarter, sales for the year are now seen flat to up 2% compared with a previous forecast of up 2% to 3% and operating margins will see a ‘modest decline’ instead of holding steady.

At the start of the year sales were seen up 3% to 4%, despite a weak first quarter, with the company banking on a second-half rebound to meet its targets. At the half-year stage it revised down its revenue growth forecast saying it still saw improving trends.

However, weak third-quarter sales of consumer health products to retailers in the US and infant formula in China have sunk any hopes of a rebound. In addition, a high level of spending on advertising will eat into profit margins.

AND THE GROWTH IS GONE

Sales of home hygiene products, which make up 40% of group revenues, were up 4.5% on a like-for-like basis last quarter, well ahead of the market which grew by between 2% and 3%.

Growth was ‘broad-based’ across all regions and brands with new products such as Airwick Essential Mist room scent and Lysol laundry sanitiser helping to boost sales.

However the consumer health business, which makes up the other 60% of revenues, suffered a number of headwinds which meant sales were down 0.3% on a like-for-like basis. This was well below the rest of the market which grew by between 3% and 5% on an organic basis.

Higher prices for its products and lower stocking by US retailers ahead of the all-important flu season meant that volumes were down for most categories. US over-the-counter sales were down a whopping 12.3% in dollars on a like-for-like basis in the third quarter.

Meanwhile sales of infant formula in the Chinese market have slowed due to a fall in the birth rate during 2017 and 2018. The firm’s latest reading of market growth is ‘below our medium-term expectations of +3-5%’ which suggests that the fourth quarter could be as bad if not worse than last quarter.

Reckitt’s former chief executive Rakesh Kapoor bet big on China when he pushed through the $16.6bn acquisition of US baby-milk formula maker Mead Johnson Nutrition in 2017.

At the time forecasts for growth in the Chinese market, where MJN was a leading player, were bullish. However, poor execution and a lower birth rate mean that China is now under-performing expectations.

NEW BROOM

New chief executive Laxman Narasimhan, who took over in September, has plenty to do to revive Reckitt’s fortunes. As well as increasing spending on marketing, which will eat into margins in the short term, he is ‘prioritising execution and operational performance as a matter of urgency’.

He has also ‘made it clear within the organisation that any activities that detract focus and attention from improving our operational performance (should) be paused’.

Other 'nasties' in his in-tray are the legacy costs of the Indivior (INDV) legal case in the US, which the firm has already provisioned for, and the lung-injury lawsuit in South Korea, the final cost of which remains unknown.

Re-setting expectations by lowering full-year guidance is probably sensible, but for the new man to re-boot growth is going to take time. Whether investors are prepared to wait is another matter.

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Issue Date: 22 Oct 2019