Lean Times for Unilever

Busy shrinking a vast and unwieldly slew of brands, the consumer-staples giant was way late to the low-carb party

By Eric Wahlgren

For too long, analysts say, Unilever (UN ), the consumer-staples giant behind household brands such as Lipton teas and Dove soaps, thought the low-carb diet craze was just that -- a craze. Its stock is still paying the price for that widely publicized miscalculation. Now, the Anglo-Dutch outfit that manufactures Slim-Fast diet products has got the low-carb religion, replacing the head of that division and preparing to roll out a slew of low-carb products.

Meantime, while Unilever's performance continues to lag, peers like France's Danone (DA ) and Switzerland's Nestlé have seen revenues and stocks rise nicely this year. Unilever squeezed only a 1.3% revenue gain from its leading brands -- a key sales measurement -- in the first quarter of 2004 amid a variety of challenges, including increasing competition.

Analysts had forecast at least a 2% boost, and the figure was a far cry from Unilever's 3% to 5% long-term growth target for leading brands such as Knorr soups and Surf detergent. Its stable of leading brands, which make up nearly 95% of sales, rose 2.5% in 2003.

STAR-STUDDED CUPBOARD.

  When the latest results were announced on Apr. 28, Unilever's American depositary receipts (ADRs), which trade on the New York Stock Exchange, dropped more than 7%. (Each Unilever ADR represents one share of Rotterdam-based parent Unilever NV. Although Unilever operates as a single company, a separate London-based parent company, Unilever PLC, trades on the London stock exchange.)

Since then, the shares have recovered some. Trading around $66 as of June 14, the stock is up about 3% so far this year, vs. a 2% gain for the benchmark Standard & Poor's 500-stock index, of which Unilever ADRs are not a component.

Unilever shares have been resilient because many of its brands, including Vaseline and Ben & Jerry's, to tick off a few more, are recognized around the world. Unilever is also highly profitable, boasting some of the fattest margins vs. its European rivals. First-quarter operating margins were a rich 14.9% before exceptional items and amortization of goodwill and intangible assets (BEIA).

FALTERING STRATEGY?

  In fiscal 2004, Unilever is expected to have 4 billion euros ($4.8 billion) in net income (BEIA), 3% higher than in 2003, on revenue of 42.3 billion euros ($51.2 billion), according to Michael Steib, executive director with Morgan Stanley in London. Steib's revenue forecast is about 1.4% lower than last year's number, mainly because of currency translations.

"They have strong brands, and they have strong value," Steib says. "Bottom-line growth and margin improvement have been impressive." Still, Steib remains neutral on Unilver, rating it equal weight. And his 58 euro price target for shares trading on the Amsterdam exchange suggests only 5% or so price appreciation in the next 12 months. "They need to demonstrate through innovation and change in brands that they intend to have a pickup in top-line growth."

Unilever management has its work cut out, analysts and company watchers say. "Growth strategy appears to have sort of faltered," says Lex Werkheim, a partner at Eureffect, an Amsterdam asset-management firm which owns Unilever shares.

SLIM-FAST'S SLOW SWITCH.

  Unilever says it's nearing the end of a five-year "Path to Growth" launched in 1999. It's on track to trim brands to the most profitable 400 from a once dizzying 1,600 worldwide, it says. It also has cut more than the expected 3.9 billion euros ($4.7 billion) from manufacturing and other operations as part of the growth initiative.

And Unilever PLC has had a change at the top. Chairman Niall FitzGerald, 58, is leaving to become chairman of British news and information company Reuters. In keeping with tradition, Unilever PLC has picked an insider to fill the spot. Patrick Cescau, a 55-year-old director of the firm's global foods division, takes the helm later this year.

But analysts want to see more progress before becoming more upbeat about the stock. First, Unilever needs to do a better job of managing its brands, analysts say, especially Slim-Fast. "In early June of last year, Unilever was still saying low-carb diets were a fad that was going to go away," says London-based J.P. Morgan analysts Arnaud Langlois, who has an underweight rating on the stock and believes the price could actually decline. Slim-Fast products traditionally have included foods such as shakes and meal bars that serve as low-calorie -- but not necessarily low-carbohydrate -- alternatives to regular food. By Eric Wahlgren

ON THE SCENT.

  Someone finally got the message. At the end of last year, Unilever rolled out five low-carb Slim-Fast products. And in its Apr. 28 earnings release, the big news was that the low-carb newcomers are already accounting for about 20% of Slim-Fast revenues.

But it also said in the same note that Slim-Fast's low-carb debut "has not yet compensated for the decline in share of the traditional products." Seventeen more low-carb products are going to be launched, the company said. And on June 4, Unilever said the president of the Slim-Fast unit would be leaving, to be replaced by a food-division exec.

Slim-Fast isn't Unilever's only struggling brand. There's also the Prestige fragrance division, which sells Calvin Klein Obsession, Eternity, cK, and other designer names. "Other companies have been quicker to launch more products," Steib says. "With fragrances, consumers are on to new things very quickly." Those twin problems with Slim-Fast and fragrances have hit Unilever particularly hard in North America, which represented 23% of revenues in 2003, and where first-quarter sales fell 4%.

In an e-mail response to BusinessWeek Online, company spokesman Trevor Gorin said consumers have not had any "significant change in taste" when it comes to Unilever fragrances. Rather, marketing the scents became tougher, as consumers became more selective in their discretionary spending. The division, Gorin says, is under new leadership and expects to see the benefits from a restructuring plan in the second half of 2004. As for Slim-Fast, Gorin says Unilever forecasts "a return to modest growth as we rebuild consumer loyalty" in 2004.

NEW FOCUS.

  Unilever also has more work to do in getting rid of underperforming brands, analysts say. As the prime target, most investing pros singled out the frozen-food business in Europe. Increased competition from discounters and others is making pricing tough there, analysts say.

Unilever has already identified 10% to 15% more frozen-food products as noncore, according to Gorin. "Actions are being taken to rationalize the portfolio and focus on higher growth segments," he says.

The company has also been criticized for not returning more of its cash on hand to shareholders, says Julian Lakin, an analyst with brokerage firm Pereire Tod in London, who rates Unilever accumulate. Cash flow in the first quarter grew 18%, to an impressive 970 million euros ($1.2 billion). Proceeding with special dividends to shareholders or stock buybacks are two methods of increasing investor interest, Lakin says.

CHECK-OUT LINE.

  For now, Gorin says Unilever is focused on trimming debt to 10 billion euro ($12.1 billion) from the current 12.5 billion euros ($15.1 billion). After that, he says surplus cash generation "will be used to enhance shareholder return."

Since Unilever's founding in 1930, it has posted average annual earnings per share growth of 8%, Gorin adds. Over the same period, that bests the Dow Jones index of industrial companies by 20%, he says. And few doubt that Unilever is a formidable company. Even Langlois, who is negative on the stock, says "management needs to be given more time" to improve the situation.

It's also true that Unilever faces multiple challenges, including growing competition in its traditionally high-margin and high-profit emerging markets. Still, investors hoping to see quick returns may want to consider giving Unilever more time before putting its shares in their shopping carts.

Wahlgren writes for BusinessWeek Online in Paris

Edited by Beth Belton

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