Anglo-Dutch consumer goods giant Unilever (ULVR) was the FTSE 100’s biggest loser on Thursday, the shares marked down 4.2% to £41.22 after the Magnum-to-Marmite maker downgraded full year margin guidance due to rising cost inflation.
This overshadowed the delivery of robust 5% second quarter underlying sales growth, in line with market estimates and despite surging Covid infections in emerging markets, thanks to a recovery in foods and refreshment sales.
Unilever’s underlying operating margin decreased by 100 basis points to 18.8% in the first half as the company encountered further cost inflation through the second quarter and invested heavily behind its brands to stay competitive.
‘Cost volatility and the timing of landing price actions create a higher than normal range of likely year end margin outcomes,’ warned CEO Alan Jope.
‘We are managing this dynamically and expect to maintain underlying operating margin for 2021 around flat.’
In April, Unilever said it expected to ‘slightly’ increase underlying operating margin for the year, so today’s update represents a downgrade to guidance and demonstrates there are limitations on the group’s ability to pass on extra costs to consumers.
Nevertheless, Jope is confident his charge will deliver 2021 underlying sales growth ‘well within our multi-year framework of 3-5%, despite more challenging comparators in the second half’.
ICE CREAM BOOST
Organic sales growth for the first half came in at 5.4%, as Unilever’s foods and refreshment sales grew by 8.1% with ice cream brands Magnum and Ben and Jerry’s both serving up double digit growth as virus restrictions began to ease.
Home care and beauty and personal care sales rose by 4.5% and 3.3% respectively, with fabric cleaners in demand, skin care products growing by double digits and deodorants returned to growth.
‘We are making good progress against the strategic choices outlined earlier this year,’ insisted Jope, ‘including the development of our portfolio into high growth spaces. Prestige Beauty and Functional Nutrition grew strongly and we recently announced the acquisition of digitally-native skin care brand Paula’s Choice.’
Jope added that the operational separation of Unilever’s €2 billion-in-revenue Tea business is ‘substantially complete’ and expects the next phase for the business to be ‘either an IPO, sale or partnership’.
AJ Bell investment director Russ Mould said Unilever’s strong sales performance shows the company is ‘well positioned against the current backdrop with its combination of cleaning and hygiene products alongside comforting household favourites which we have all reached for during the pandemic.
‘Unilever is also streamlining its operations, separating out its tea and smaller beauty and care brands as it looks to focus on the really strong parts of the business.
‘Unilever has made a big play of its ESG credentials, however the recent decision by the independent board of its Ben & Jerry’s ice cream brand to stop sales to Israeli settlements in the occupied Palestinian territories, and the furious response it has triggered from Israel’s government, shows there can be costs to taking a stance.’