Unilever (UN) Q2 Revenues Drop, Growth Weak; Stock Falls

Shares of Unilever (LON:ULVR) N.V. (NYSE:UN) declined 6.06% in after-hours trading on Jul 21 after the company posted weak second quarter 2016 results.

In the second quarter of 2016, Unilever’s sales declined 2.6% due to currency headwinds. Unilever delivered organic sales growth of 4.7% (in local currency), which was toward the upper end of the 3% to 5% range expected for the year. This was driven by pricing gain of 2.8% and volume growth of 1.8%. Organic sales growth was same as that of the preceding quarter.

Emerging markets grew 7.7% in the second quarter of 2016, weaker than the preceding quarter’s growth of 8.3%, with an increased contribution from volume. Many emerging markets continued to remain weak with currency devaluation pushing up the cost of living and squeezing disposable incomes.

Encouragingly, the company witnessed good volume growth in Asia and price growth in Latin America, despite difficult macro-economic conditions and lower consumer confidence. However, in Brazil and Argentina, market volumes continued to contract as consumers struggled with rising unemployment and high local inflation brought on by currency adjustment. Falling real wages are also holding back demand in commodity exporting countries like Russia, South Africa and in the Gulf. The economies in China, India and Southeast Asia are in a better position but are negatively impacted by weak consumer demand.

Developed markets grew 0.7% in the quarter as against 0.3% decline in the preceding quarter with volume growth more than offsetting price deflation in Europe.

The company witnessed growth in all the categories of Personal Care, Refreshment, Home Care and Foods, with improved volumes and pricing, except volume decline in the Foods category.

Outlook

Overall, we are encouraged by the fact that Unilever is consistently focusing on improving its products through innovation. While the company is introducing new products in some markets, it is re-launching some of its products with improvements in the existing markets.Unilever has also accelerated its cost containment measures to remove unnecessary costs and simplify the business.

However, the company still remains concerned about deteriorating trends in Europe, Brazil and Russia. Consumer demand continues to remain weak. Many emerging markets continue to be volatile, particularly those dependent on oil and other commodity exports and those where currency devaluation is pushing up the cost of living for consumers.

For the year 2016, the company expects currency to impact sales and earnings by 5 to 6 percentage points.

Unilever has a Zacks Rank #4 (Sell).

Better-ranked players in the consumer staples sector include Post Holdings, Inc. (NYSE:POST) , The J. M. Smucker Co. (NYSE:SJM) , and United Natural Foods, Inc. (NASDAQ:UNFI) . All of them sport a Zacks Rank #1 (Strong Buy).