Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

The curse of the superstar CEO shift has struck Reckitt Benckiser at last.

So far, the consumer goods group has been that rare animal in British corporate life, a company that's replaced a long-serving chief executive officer without carnage.  Five years ago, Rakesh Kapoor took over from Bart Becht, who had run the company successfully for 12 years. 

But cracks are beginning to show.

Reckitt on Wednesday reported third-quarter underlying sales growth that missed analyst estimates, and revised down its full-year sales guidance to growth of 4 percent, the low end of its previous range.

The company reported the lowest rate of organic growth, which excludes the demerged pharmaceuticals business, since Kapoor arrived in 2011. Shares fell as much as 3.7 percent on Wednesday.

Superstar Flameout?
Reckitt's second CEO had a great start, but the 3rd-quarter sales slippage is a bad sign.

That might not seem too catastrophic, given, say, the meltdown at Tesco that followed the exit of its lauded leader, but it's dramatic for a top performer like Reckitt.

Two of the reasons for the the slow-down are outside of its core strategy: plummeting sales in South Korea after the deaths of over 100 people were linked to toxic humidifier sanitizers it once sold, and difficult conditions in Russia. It's addressing both as best it can.

But the third reason for the disappointment is more concerning: new Scholl footcare products failed to entice shoppers in Europe and North America to the level that had been expected. 

That's worrying on two fronts. Kapoor has continued Becht's strategy of moving away from slower-growth homecare products into more vibrant consumer-health categories. Any wobble here could threaten that successful formula.

Meanwhile, one of Reckitt's perennial strengths has been its product innovation. If this is now failing to chime with consumers, that raises concerns it's lost its magic touch.

Punchy Premium
Reckitt's forward price to earnings valuation has come down from its lofty heights.
Source: Bloomberg

Kapoor said Wednesday the performance in the final three months of the year would have to be better than the third quarter to meet the lowered expectations.

That looks unlikely given the existing challenges and some emerging headwinds: commodity prices are rising and consumer sentiment in Europe has weakened over the course of this year. Kapoor acknowledges that the fourth quarter won't be a walk in the park.

True, there is no Tesco-style implosion going on here. And Reckitt, generating the majority of its income outside the U.K., will benefit from weaker sterling.

But investors should beware: when a stellar performer starts to wobble, it is never a comfortable place for the broader market to be.

Reckitt's forward price earnings ratio has tumbled over the past three months. It still has one of the top three highest margins in the sector. But even so, some narrowing of the premium over peers is deserved, given the loss of sales momentum. And there is little room for error if sales decelerate further, or commodity pressures eat into the margin.

Without improvement in the next few months, Reckitt will need more than its Cillit Bang to clear up the mess from this trading upset.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net