Unilever Posts Weak Q2 Sales on Emerging Markets Slowdown

Shares of Unilever Plc UL declined 2.5% since it reported weak second quarter 2014 results on Jul 24 due to continued soft growth in the emerging markets.

Revenues of this fast-moving consumer products giant declined 4.8% year over year (in local currency) to Euro 12.7 billion (*$17.4 billion), hurt by unfavorable currency impact of 8.1%. Acquisitions contributed 0.6% to revenues, while disposals negatively impacted revenues by 0.8%. The company saw weakness in revenues in the European region, while it improved in Asia and the Americas region.

The company delivered organic sales growth of 3.8% (in local currency) in the second quarter of 2014, driven by organic volume and pricing gains of 1.9% and 1.9%, respectively. Organic sales growth improved from the preceding quarter growth of 3.6%, but was lower than last year's growth of 5%.

The company stated that the pace of sales growth has continued to slow down since the fourth quarter of 2013, mainly due to its operations in emerging markets, which account for two-third of its revenues. The company's organic sales growth of 6.6% (in local currency) was flat in the emerging markets in the second quarter as a result of economic uncertainty, particularly in Asia. Organic sales growth was much higher at 10.3% last year.

Developed markets grew marginally by 0.3%, as positive volume growth partially offset declining price. But developed markets continued to remain weak with little sign of recovery in North America or Europe. However, it was still better than a decline of 0.3% in the preceding quarter and a decline of 1.3% in the year-ago quarter.

Segment Details

Though the company's sales are pressurized by macroeconomic headwinds, Unilever is consistently focusing on improving its products through innovation in all the categories. While the company is introducing new products in some markets, it is re-launching its products with improvements in the existing markets.

Personal Care: The segment delivered organic sales growth of 4.5% (in local currency) in the second quarter of 2014, driven by organic volume and pricing gains of 2.2% and 2.2%, respectively. A strong innovation program continued to drive impressive performance in the quarter.

In the Hair section, the company benefited from global brands like Dove and Tresemme. The company also launched the Clear shampoo brand in Japan and re-launched it in key markets such as Brazil and China. The skin cleansing category got a boost from Lifebuoy, Lux and Fair & Lovely beauty products.

Deodorants grew supported by the success of compressed aerosol format extended to new markets in Europe, good growth of Rexona and Dove brands and the introduction of new packaging for Axe. In the oral care category, the company launched a new brand, Regenerate Enamel Science, in the UK. The brand is the first toothpaste and serum system that regenerates enamel with exactly the same mineral, which makes up tooth enamel.

Foods: The segment saw organic sales growth of 0.7% (in local currency) in the second quarter of 2014 due to a 0.1% organic volume growth and pricing gains of 0.5%. Overall, the segment benefited due to a late Easter in 2014 and improved market share in both Europe and North America.

In this segment, dressings grew on the back of improved performances from Hellmann brand and the extension of a new packaging in Brazil Savory made good progress in the emerging markets. However, spreads performance continued to remain weak, despite improvement in market share of margarine.

Home Care: The segment delivered organic sales growth of 6.2% (in local currency) in the second quarter of 2014, driven by organic volume and pricing gains of 2.5% and 3.5%, respectively. The laundry section performed well with the recent launch of Persil Dual Action capsules in the United Kingdom. Omo was re-introduced in Saudi Arabia and Skip Small & Mighty liquids were launched in South Africa. Household care continued to grow driven by Cif and Domestos brands.

Refreshment: The segment delivered organic sales growth of 4.5% (in local currency) in the second quarter of 2014, driven by organic volume and pricing gains of 3.1% and 1.4%, respectively. Refreshment sales improved in the quarter due to solid performance in the ice-cream category with brands like Magnum, Ben & Jerry's and Cornetto. Tea continued to grow driven by Lipton K-cups and new liquid concentrate. However, tea sales in Russia and Saudi Arabia were soft.

Unilever holds a Zacks Rank #3 (Hold).

Some players worth considering in the consumer staples sector include Treehouse Foods Inc. THS, Colgate-Palmolive Co. CL and Pinnacle Foods, Inc. PF. While Treehouse sports a Zacks Rank #1 (Strong Buy), Colgate-Palmolive and Pinnacle hold a Zacks Rank #2 (Buy).

*1 Euro= $1.37183 for the quarter ending Jun 30, 2014