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Reckitt – beats sales expectations, full-year guidance reiterated

Reckitt exceeds quarterly sales forecasts but struggles in Nutrition persist.
Reckitt Benckiser - positive start to the year

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Reckitt reported first-quarter net revenue of £3.7bn, reflecting like-for-like (LFL) growth of 1.5%. This was ahead of market expectations as 2% higher average selling prices offset a 0.5% drop in volumes.

Both the Hygiene and Health business units contributed to growth, with Hygiene showing the strongest performance. Nutrition declined by 9.9% as sales levels normalised following a strong comparative period which benefitted from competitor supply issues.

Reckitt remains on track to achieve full-year revenue and profit targets, with growth expected to be weighted toward the second half of the year. This includes 2-4% LFL net revenue growth and a return to growth for Nutrition later in the year.

It also announced the acceleration of its ongoing £1.0bn share buyback program.

The shares rose 4% in early trading.

Our view

Reckitt is the maker of household and hygiene staples like Air Wick, Harpic, and Vanish. First-quarter results saw all divisions perform stronger than the market expected. The trend of price hikes helping to overcome falling volumes continued, but there were signs of progress in the latter.

As the biggest contributor to sales, it's good to see volumes in Hygiene trending back in the right direction. Investors have been looking for a better balance between volume and price led growth and it looks like we might have reached the inflection point where things start improving. Key brands Finish and Lysol will be key to making that happen and early numbers for the year look promising.

Nutrition's the smallest division but has continued to be a volume drag. Last year's sales were inflated by competitors' supply issues, and as they come back to market, Reckitt's giving back some of the market share it gained. But this looks to have stabilised and management are confident the division should start growing again by the end of the year.

Reckitt's spent the last couple of years improving and sharpening its proposition and the portfolio's undergone a hefty shakeup. Meanwhile, a growing online presence means e-commerce continues to grow and makes up roughly 15% of total revenue. Long term, this could allow the group to bypass retailers - helping boost Reckitt's share of the pie.

These changes, along with cost cuts, have helped gross margins return to historic levels. While we’re happy to see progress, there’s a slight worry that a focus on costs and gross margins is a temporary fix. To sustain longer term growth, we’d like to see more of a focus on finding new distribution and increasing market share.

The balance sheet's in reasonable health, with net debt improving - down to 1.9 times cash profit (EBITDA) last we heard. The £2.3bn of expected free cash this year should help to sustain the ongoing £1bn buyback. Of course, no returns are guaranteed.

The court cases relating to its US subsidiary, Mead Johnson and its infant formula have continued to weigh on sentiment, but recent news appears to be more positive. The CEO has re-iterated his confidence in their defence. He believes it’s supported by the public health community and importantly the independent NEC Society which is advocating against litigation.

The current valuation doesn't look overly demanding, but the next few quarters are vital. Meaningful volume recovery isn't expected until later in the year, which means investors should be prepared to wait for the tide to turn. In the meantime, uncertainty is rarely taken well and until there is greater clarity on the scale of the potential US litigation, a re-rating is unlikely.

Reckitt Benckiser key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. 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
Guy Lawson-Johns
Equity Analyst

Guy works as an Equity Analyst within the share research team, delivering current research and analysis on individual companies as well as broader sectors.

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Article history
Published: 24th April 2024