Unilever Sales Slowed in Third Quarter on Emerging MarketsMatthew Boyle
Unilever, the world’s second-largest consumer-goods maker, said sales growth weakened in the third quarter amid a further slowdown in emerging markets, sending the shares down the most in almost two years.
Underlying revenue for the three months rose 3 percent to 3.5 percent, the maker of Lipton tea and Dove soap said in a statement after markets closed yesterday. That compares with 5 percent growth in both the first half and second quarter.
Unilever said emerging-market growth slackened in the third quarter because of weak currencies in some developing countries, though repeated its full-year goals. The Magnum maker gets about 57 percent of sales from emerging regions, making it susceptible to slowing economies in nations such as India and China. It’s the first time the company has given quarterly sales guidance of any kind under Chief Executive Officer Paul Polman, who did away with forecasts when he took the helm in 2009.
“We are concerned that emerging markets will continue to be a drag across consumer staples for the next few quarters,” said Alicia Forry, an analyst at Canaccord Genuity in London. “Our numbers will need to be adjusted,” said Forry, who had estimated 4 percent growth in third-quarter underlying sales.
Unilever fell as much as 4 percent to 27.62 euros in Amsterdam trading, the steepest intraday drop since Feb. 2, 2012. The stock was down 3.1 percent at 27.88 euros at 1:53 p.m., dragging the consumer peer group lower. Nestle SA, the world’s biggest food company, slid as much as 1.5 percent, while brewer SABMiller Plc dropped as much as 4.1 percent. Procter & Gamble Co., the world’s largest consumer-goods company, declined 2.1 percent to $75.59 in New York yesterday.
A slowdown in emerging markets accelerated “as a result of significant currency weakening,” according to Unilever, which gets about three-quarters of revenue outside Europe.
Underlying sales growth strips out the effect of currency fluctuations, yet in countries such as Indonesia, Brazil, South Africa and India, weakening currencies have “squeezed local incomes,” according to Sanford C. Bernstein analyst Andrew Wood. The resulting “inflationary pressure” has hurt demand, Liberum Capital analyst Pablo Zuanic said in a note today.
Unilever joins consumer companies including Adidas AG in saying that currencies are affecting growth. The world’s second-largest sporting-goods maker last month reduced the lower end of its profit outlook because of currency movements and a distribution issue in Russia. Handbag maker Prada SpA said the euro’s strength will weigh more heavily on full-year earnings after first-half profit missed estimates.
The euro has strengthened 5.4 percent this year, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
Polman has been discussing a slowdown in emerging markets for more than a year. In July 2012, he told analysts that growth rates in regions like China, Brazil and India were slowing and this year said it wasn’t realistic to expect sales growth in those regions to be maintained after nine straight quarters of double-digit gains. Unilever’s statement indicates that underlying sales in emerging markets rose about 6 percent in the third quarter, slowing from 10.3 percent in the first six months of the year, Nomura analyst Mark Howden said in a note.
Developed markets remain “flat to down,” said Unilever, which is due to report third-quarter sales figures Oct. 24. Analysts including Bernstein’s Wood had expected a recovery in mature markets such as the U.S. to offset the emerging-market slowdown, yet “this did not materialize,” he said. Sales in developed regions fell 1.6 percent in the first half.
The “disappointing” growth in developed regions should prompt a “re-evaluation of Unilever’s strategy, particularly in spreads,” a business that the company has struggled to turn around, Panmure Gordon analyst Graham Jones said in a note.
Unilever continues to grow ahead of its markets and expects underlying sales growth to improve in the fourth quarter, Polman said in yesterday’s statement, which was released before the company’s participation in investor conferences this week.
“For 2013, we are still on course to deliver against our priorities of profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow,” London- and Rotterdam-based company said.
Nomura cut its estimate for Unilever’s 2013 adjusted earnings per share by 6 percent to 1.50 euros, while Panmure Gordon reduced its prediction by 1.3 percent to 1.52 euros.
Beyond the cuts to estimates, the “larger impact” of yesterday’s news concerns Polman’s credibility, Wood said. The announcement “does not create a feeling of comfort that Unilever has achieved the reliability, consistency and dependability that we had hoped for.”
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