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Nestle - sales growth supported by higher prices

Full year guidance remains on track.

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Nestlé reported Q1 sales of CHF 22.2bn (Swiss francs), reflecting organic growth of 7.6%. Volumes and pricing contributed 2.4% and 5.2% respectfully. Growth was broad-based across most geographies and categories, with out-of-home sales (think hospitality) now ahead of pre-pandemic levels.

Full year guidance remains on track, with organic sales growth expected around 5% and underlying trading operating profit margin between 17.0% and 17.5%.

CEO Mark Schneider said, "Cost inflation continues to increase sharply, which will require further pricing and mitigating actions over the course of the year".

The shares rose 1.7% following the announcement.

View the latest Nestlé share price and how to deal

Our view

With input costs on the rise, Nestlé's had to resort to price increases to keep things ticking along. That's contrary to the groups volume led strategy but no one's immune to the wider inflationary pressures so it's a necessary flex. The good news is that so far volumes are still managing to edge higher thanks to a strong range of products.

More broadly, the underlying performance has been very impressive. A global footprint and varied product base mean the group's been able to move with the market over the past couple of years. Exposure to pet care, health and at-home coffee products in particular helped in lockdown conditions. They're also exactly the kind of thing people buy over and over again in normal times.

We also admire the operating model, which as mentioned focuses on volume instead of price increases. That's helped deliver underlying sales growth of at least 2% for over 20 years. And, despite obvious challenges to the model, sales are expected to keep moving in the right direction over the medium-term.

That being said, the price side of the equation is facing some headwinds. In addition to inflation, pricing pressure from new entrants and supermarkets' own-brands are a threat. But Nestlé's business model is better placed to tackle this dilemma than some other groups.

Nestlé relies on a research & development spend of more than 1.5bn Swiss Francs (CHF) a year to provide fuel for volume growth. New varieties and formats of existing popular brands benefit from the much larger marketing and admin budgets, ensuring they're front and centre of consumers' minds. That in turn encourages reliable revenues. Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products.

That virtuous cycle has seen the group increase the dividend every year for 29 years - although remember all dividends are variable and not guaranteed.

The group has been doing a bit of housekeeping recently, clearing out low potential brands and stocking up in growth areas such as The Bountiful Company's nutrition and supplements business. A higher growth portfolio can only be a good thing, and the group's been trimming its stake in L'Oréal which stood at 20.1% last we heard.

Nestlé's not a company likely to deliver dizzying levels of growth from here. It's more steady-eddie than stellar growth stock. However, Nestlé's resilience comes at a price, with a Price/Earnings ratio above the long-term average. That reflects the group's strengths, but also means there's pressure for sales to keep moving forwards.

Nestlé key facts

All ratios are sourced from Refinitiv. 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.

First Quarter Trading Update (organic)

North America saw sales grow 9.9% to CHF 5.8bn, largely driven by price hikes which contributed to 8.5% of the growth. The region saw continued broad-based market share gains, with e-commerce a strong performer. At the product level, Purina PetCare was the largest growth contributor and Starbucks out-of-home products posted double-digit growth.

In Europe, sales grew 6.9% to CHF 4.6bn as volume and price increases contributed 2.8% and 4.1% respectfully. Similar trends were seen here, with e-commerce and the recovery of out-of-home channels (think hospitality) performing well. Growth in coffee was flat following strong gains last year, nonetheless it was a main contributor to market share gains along with pet and plant-based food.

Price rises made up 4.3% of the 6.0% sales growth in Asia, Oceania and Africa, with sales coming in at CHF 4.6bn. South Asia reported double-digit growth as Maggi and Nescafe performed well, Sub-Saharan Africa performance was also of note. Again, out-of-home channels recovered well, and momentum continued for more affordable product lines.

Sales in Latin America grew 12.5% to CHF 2.7bn, with volumes up 4.7% and pricing 7.7%. Brazil, Chile and Mexico all saw double-digit sales growth. Confectionary was the largest contributor by product category, with KitKat the standout.

Greater China growth was purely a result of higher volumes, with sales up 3.4% to CHF 1.4bn despite a 0.5% drop in pricing. Strong sales in most categories were partly offset by a decline in Infant Nutrition. The timing of the Chinese New Year was also called out as having a negative impact on sales growth.

Nespresso posted sales of CHF 1.6bn, up 3.3% and almost entirely down to pricing which contributed 3.1%. Nestlé Health Sciences saw sales grow 5.6% to CHF 1.4bn, this time volume growth was the main contributor, up 4.3%. The acquisition of brands from The Bountiful Company helped reported sales jump 55.8%.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Matt-Britzman
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 21st April 2022