All consumer companies love to under-promise and over-deliver when it comes to growth and innovation. With its back to the wall last year after batting away a surprise and unwelcome £115 billion takeover offer from Kraft Heinz of America, Unilever felt obliged to make a number of very big promises in the hope of seeing off any further unwanted approaches and accelerate value creation for shareholders. These included selling off its low-growth spreads business, raising its dividend and a €5 billion share buyback. It also stepped up acquisitions and launched a handful of new products to refocus its portfolio on higher growth lines.
Yesterday’s full-year results show the Anglo-Dutch consumer goods giant making good early progress on meeting some of its ambitious goals, though they also raise questions about its ability to continue delivering margin expansion and organic growth simultaneously.
Underlying sales growth, excluding the recently disposed spreads division, grew a respectable 3.5 per cent last year, in an uncertain consumer climate. With new brand innovations speeding up growth in the fourth quarter, margins were higher and free cashflow rose. The group raised the quarterly dividend by 12 per cent. However, while the initial signs are encouraging, analysts at Hargreaves Lansdown are not alone in believing that Unilever still has much to do if it is to sustain this momentum over the coming years.
The company benefits from well-loved brands, such as PG Tips and Dove, as well as a formidable geographic footprint, with more than 40 per cent of its sales generated in faster-growing emerging markets. But things are becoming tougher as the internet opens the way for smaller brands to reach a larger audience. It’s no longer enough to dominate shelf space at supermarkets and run national TV campaigns. In today’s digital world, consumers can compare prices at the click of a button and gain access to brands they have never encountered.
In response, the company is seeking to build direct relationships with its customers. Ecommerce sales were up 80 per cent for the year to just under €2 billion, driven by improved capability and acquisitions, for example with its purchase in 2016 of Dollar Shave Club, an American mail order company that sells low-cost razors and blades. Yesterday the company’s chief executive, Paul Polman, cited the example of the “laundry bundles” (combining detergent and fabric softener, for example) it now sells on Amazon as a sign of its focus on new channels. The company is also experimenting with its own pop-up stores.
While it’s not a stretch to believe that Unilever may deliver on its organic revenue growth target of 3 to 5 per cent by 2020, James Edwardes Jones, an analyst at RBC, expects the company to miss its target for 20 per cent margins by 2020, up from 17.5 per cent last year. His concern is that there’s a risk the company will neglect marketing investment to hit the margin target, exacerbating top-line weakness and penalising market share.
That might be too gloomy. While brand and marketing investment was down as a percentage of turnover last year and absolute spending here was flat, the company said it made savings in advertising production, which it re-invested in increased media spend, particularly in the second half of the year. On the company’s earnings call yesterday, Graeme Pitkethly, the chief financial officer, said that the company invested €250 million more in media and in-store channels last year than in 2016. Unilever is also lifting its investment in digital media at a time when rivals such as Procter & Gamble are cutting back amid fears about its effectiveness.
ADVICE Hold
WHY Sales are growing, but questions remain over the ability to increase margins
Rank Group
The market couldn’t seem to make up its mind about Rank Group’s half-year results yesterday. The shares spent most of the morning down a penny or two then, after a modestly up-and-down afternoon, they closed up 1p at 228p.
In many ways the market reaction is symptomatic of a wider indifference to the gaming company. Part of the problem is that it remains under the majority control of Quek Leng Chan, the Malaysian billionaire. Taking a minority stake in a stock where somebody has 56.1 per cent is not for every investor.
The results themselves — adjusted pre-tax profits rose by 17 per cent to £40.2 million and comparable revenues grew by 1 per cent to £378.1 million — hardly presented a compelling investment case. While its digital business has been firing on all cylinders (revenues up 16 per cent and profits up 56 per cent), it remains the smallest part of the business.
Its bricks-and-mortar operations, principally Grosvenor Casinos and Mecca Bingo clubs, still make up the lion’s share of turnover and profits. And that’s the problem. Revenues from these venues fell back by 1 per cent to £317.5 million and the main reason their operating profits grew by 9 per cent was cost-cutting — hardly a recipe for long-term growth.
While the structural challenges facing bingo clubs are hardly new news — Mecca’s revenues fell by 4 per cent and profits by 5 per cent — the best that Rank can do is to keep the clubs in decent nick while trying to broaden their appeal with livelier sessions aimed at a younger audience.
Grosvenor provides greater grounds for optimism for a return to growth. Part of its slight fall in revenues was down to a lower-than average gaming margin, which it cannot control, while refurbishments at its Piccadilly and Golden Horseshoe casinos in London also took their toll. However, such investments in its casinos can generate significant returns and further funds will be deployed.
Under its chief executive, Henry Birch, Rank is also using its retail operations to drive its digital growth, making it one of the few gaming companies to provide a multichannel offer that enables its customers to benefit from bonuses and promotions across both retail and digital.
ADVICE Hold
WHY Strong cashflows and a net cash position should drive shareholder returns
