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Unilever - sales dip but profit improves despite lockdowns

Sophie Lund-Yates, Equity Analyst | 23 July 2020 | A A A
Unilever - sales dip but profit improves despite lockdowns

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Unilever plc Ordinary 3.11p

Sell: 3,910.50 | Buy: 3,912.50 | Change -27.50 (-0.70%)
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Underlying sales fell 0.1% in the first half of the year. That reflects price growth of 0.2% which was offset by a 0.3% decline in volumes. However, a positive impact from acquisitions meant group turnover rose 1.2% to EUR25.7m, ignoring the impact of exchange rates.

Cost control in the wake of coronavirus disruption meant underlying operating profit improved 3.8% to EUR5.1bn - again this ignores the impact of exchange rates.

Unilever announced it will be demerging part of the tea business following the strategic review.

The group announced a quarterly dividend of EUR0.4104 per share.

The shares rose 6.6% following the announcement.

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Our View

The latest round of results were better than the market expected.

While coronavirus is still hurting the top-line, as out-of-home eating ground to a halt, the damage hasn't been as severe as feared. The sale of hygiene products and a huge increase in food retail sales have helped mitigate the disruption. That's fed into some pretty strong profit growth given the circumstances - helped by lower marketing spending. As advertising starts to get turned back on we expected some of the margin benefit to unwind, but it's good to see progress has been made.

This positive news comes at a time when Unilever is looking for ways to secure long-term growth. Prior to the pandemic sales were sluggish, particularly in developed markets.

That's behind Unilever's plans to pursue a single listing on the London stock exchange. A simplified legal structure makes things like disposals easier and will help the group streamline its operations. First up will be the sale of the tea business in developed markets - household names like PG Tips are among those being cast out.

The move is Unilever's way of making sure it's in the best possible shape to start the difficult process of rejuvenation. Even though a third of the world's population uses one of its products every day, Unilever has struggled to hold onto sales growth in recent times.

We wonder how much of the pressure is coming from a weakening of brand power. Smaller brands and cheaper own-brand options have sprung up in recent years, helped by a surge in digital marketing. This can undercut the potency of Unilever's multi-million pound traditional advertising campaigns.

This is a particular bugbear for the consumer giants because brand power and loyalty increase prices and boost margins. Some of the extra profit is then reinvested in next year's marketing budget, keeping the virtuous circle spinning. If a consumer base becomes less loyal it throws that circle through a loop.

We should add it's not that Unilever has lost the war. Margins of almost 20% mean it has room to help cushion the effect of any disruption. Being one of the biggest gives Unilever firepower to fend of competition in the form of large budgets too.

Overall we've been pleasantly surprised by recent progress, but there is still work to be done. Unilever might be faring better than feared, but that isn't the same thing as thriving. As one of the consumer giants we don't really have concerns over survival, but we need to see how exactly the group intends to propel long-term sales growth from here.

Unilever key facts

  • Forward Price/Earnings Ratio: 19.3
  • 10 year average forward Price/Earnings ratio: 18.4
  • Prospective yield: 3.5%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half year trading details

Overall, underlying sales grew 2.4% in developed markets but declined 1.9% in emerging markets. Underlying operating margins rose to 19.8% from 19.3% last year. Unilever reallocated spending as lockdowns came into place in different geographies, and marketing spending was lower.

Beauty & Personal Care saw underlying sales fall 0.3%, as volumes grew 0.1% but prices fell 0.4%. There was reduced demand for personal care items like skincare during lockdowns, although hygiene products were popular. Oral care demand held up well, but volumes reduced because of disruption caused by lockdowns. Overall turnover reduced 1% to EUR10.6bn.

Underlying operating margins rose to 23.5% from 23.0%, which fed into underlying operating profit growth of 1.1%.

Foods & Refreshment was impacted by the closure of out-of-home eating in many markets over lockdown. This and lower tourism saw the sales of ice creams fall around 30%, while food service sales declined 40%. Overall underlying sales fell 1.7%, with volumes down 2.5% and prices improving 0.8%. There was double digit growth across the retail food business, with Knorr and Hellmann's products performing well.

Turnover was 2.2% lower at EUR9.8bn. Operating margins were 0.2 percentage points lower, reflecting a less profitable mix of products and the negative effects of scale during the closures. Underlying operating profit fell 3.1% to EUR1.8bn.

Homecare underlying sales grew 3.2%, reflecting volume growth of 2.9% and positive pricing of 0.3%. Growth was driven by increased demand for household cleaning products like Cif. Underlying operating profit of EUR817m was 8.1% higher and reflects cost savings and lower commodity costs which boosted margins.

Following the strategic review of the tea business Unilever announced it will keep the tea businesses in India and Indonesia and the partnership interests in the ready-to-drink tea joint ventures. However, the remaining tea businesses and brands (which generated EUR2bn revenue last year) will be sold. The separation is due to conclude at the end of 2021.

Better management of payment receivables and lower capital expenditure helped free cash flow rise EUR1.3bn to EUR2.9bn. That fed into a reduction in net debt to EUR22.8bn (EUR23.1bn at the end of 2019).

As at 30 June Unilever had access to EUR8bn in undrawn credit.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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