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Unilever - price hikes slow, trading in line with expectations

Unilever reported third-quarter sales of €15.2bn, reflecting underlying sales growth of 5.2%...

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Unilever reported third-quarter sales of €15.2bn, reflecting underlying sales growth of 5.2% - in line with expectations. Price hikes of 5.8% more than offset a 0.6% drop in volumes.

Unilever's largest brands drove performance - led by Dove, Hellmann's Rexona and Sunsilk. Ice Cream was the only division to see a drop in underlying sales growth, as consumers traded down and Europe saw unfavourable weather.

New CEO, Hein Schumacher, provided further information on plans to drive growth. There's set to be an increased focus on 30 of the largest brands, with an overarching goal of improving gross margins at the group level.

The quarterly dividend was maintained, at €0.4268.

The shares fell 2.2% in early trading.

View the latest Unilever share price and how to deal

Our view

Third quarter trading was broadly in line with expectations. Price hikes are easing across most geographies and that trend should continue, Europe may be the exception where prices still lag behind inflated costs. Volumes were a little weaker than expected, with the premium Ice Cream brands striuggling in a market where consumer are trading down, and the Nutrition market's proving tricky.

In Unilever's case, a small drop in volumes when the Group's pushing hefty price hikes onto consumers isn't the end of the world.

Protecting the quality of Unilever's brands is the number one priority, and that comes at a heavy cost. Brand and marketing investment rose EUR0.4bn over the first half and increased spend is expected to continue. That's all part and parcel with the Group's strategy of locking in long-term customers with well-known, trusted, brands.

There are other levers to pull too. Along with third-quarter trading, the new CEO provided further information on his plans to drive performance into another gear. Trimming the portfolio has already been on the cards, so it's not too surprising to hear a renewed focus on some of the largest brands which represent over 70% of sales. Getting gross margins moving back in the right direction is the real key.

To help achieve that, the Group's streamlined both its internal structure and its sales operations. The EUR600m cost-saving program, weighted toward the second half, certainly sounds promising. Turning a beast like Unilever into a streamlined outfit isn't a quick process. But with new management, activist investors on the board pushing for action, and a better focus on more profitable businesses, we're optimistic.

There are specific pockets where improvement's needed. The number of products winning market share is falling, now at 38% on a rolling 12-month basis, as lower margin products are being removed and consumers are favouring price areas that Unilever doesn't want to operate in. The expectation is for trends to improve again and for that figure to push back toward 50% over the medium term. We're inclined to agree, but it's something worth keeping an eye on.

The 4.0% prospective forward dividend yield and ongoing buyback are currently supported by strong free cash flow and a robust balance sheet. Dependability is an attraction, and we don't see too much upsetting the apple cart here. But, as ever, potential returns can't be relied on.

All in, Unilever looks well-positioned to continue delivering solid performance under tricky conditions. The valuation sits below the longer-term average, which could prove attractive if the new CEO can navigate a challenging short-term environment. Of course, nothing is guaranteed.

Unilever 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.

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
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: 26th October 2023