There hasn’t been much praise lately for Alan Jope, the boss of Unilever, pilloried by some big shareholders for an ill-judged and failed bid for GSK’s consumer healthcare division. And though the giant consumer goods group may have lifted sales guidance for this year, investors should be wary of heaping gratitude his way.
Because of price increases, organic sales growth this year is expected to be above the top end of the range of 4.5 per cent to 6.5 per cent suggested previously. Underlying price growth across the group’s three divisions was 9.8 per cent during the first half of the year, which offset a 1.6 per cent decline in sales volumes. That decline is set to worsen over the second half, but the company reckons higher prices, justified by rising costs, will continue to cancel out the effect of consumers cutting back.
Yet the market remains justifiably doubtful that higher top-line growth will materialise over the longer term. Since Jope was appointed chief executive in January 2019, the shares have fallen by almost 4 per cent and investors have grown more sceptical about Unilever’s ability to deliver on earnings growth expectations. The shares trade at just under 19 times forward earnings, below a multiple of 20 at the start of 2019 and lower than the long-running average.
What Unilever must do to close that valuation gap is clear — accelerate organic sales growth — but the means by which it believes it will achieve its ambition is less convincing. Over the past decade the group has produced underlying sales growth at the bottom end of a long-term 3 per cent to 5 per cent target range, or has missed it entirely. Top-line growth has been stuck at about 3 per cent, at the lower end of a target of 3 per cent to 5 per cent.
The company thinks that 4.5 per cent growth is realistic, a rate it has managed only once in the past nine years — and that was when cost inflation justified price increases.
What’s so different this time? Bosses point to businesses sold or due to be offloaded. The spreads division? That sale was completed in 2018 and still the food and refreshment unit has reported sales growth of less than 3 per cent in two out of the three years since. Ditching the tea business later this year? That accounted for only 10 per cent of revenue generated by the foods and refreshment business in 2020, so blaming below-par underlying sales growth solely on Ekaterra doesn’t seem fair. What about acquisitions in the higher-growth prestige beauty and health and wellbeing sectors? As analysts have pointed out, Unilever has spent about €16 billion on deals since 2015 and still has failed to ignite the rate of sales growth.
The decline in sales volumes during the first half was not as severe as the company had expected, but price increases did not fully cover the impact of inflation on the margin. The underlying operating margin declined to 17 per cent and is expected to fall again to about 16 per cent for the full year. Achieving an improvement from next year relies not only on €2 billion of savings coming through, but also the group holding on to some of the price increases put through in a period of rapid inflation. Given how hard-won any sales price growth has been in recent years, that’s a big “if”.
Calls for more ruthless disposals of lower-growth businesses in foods and the ice cream division are likely to intensify. Investors have found the man to push for that move in Nelson Peltz, the American activist investor who has a seat on the Unilever board. Agitation by Peltz and others to force more sales remains the best hope for shareholders in catalysing a sustainable increase in top-line growth and profit expansion.
ADVICE Hold
WHY Activist intervention could force more business sales and improve organic sales growth
Wickes
A profit warning from Wickes confirms the inevitable: that demand for home improvement products is suffering a post-lockdown decline, made worse by the soaring cost of living.
Earnings expectations have been trending down ever since the DIY retailer was floated on the stock market last year, which has left the shares trading at under seven times forward earnings. Diminishing demand for bigger-ticket “do it for me”, or DIFM, items — primarily whole kitchens and bathrooms — together with a return to more normal sales to “do it yourself” and trade customers have forced the company to cut its adjusted pre-tax profit guidance for this year to between £72 million and £82 million, from the £87 million that analysts had expected. That would still leave profits ahead of their pre-pandemic level, but they would be behind the £85 million recorded last year.
A paltry valuation and the magnitude of the share price decline that greeted the profit warning suggest investors are wary that the guidance might yet be cut further or even missed when the retailer reports full-year figures early next year. That will depend on whether falling consumer spending causes sales to ease again during the second half of the year. During the first half of the year, DIY and trade sales were down 5.5 per cent on the same time 12 months earlier, but much stronger growth from DIFM meant Wickes managed 0.8 per cent sales growth at a group level. The DIFM business is higher-margin, so a downturn here would hurt profits more. There is also the question of how long it can balance sales price competitiveness while sharing some of the pain of cost inflation.
Like its peers, Wickes is highly cash-generative and has net cash of more than £100 million on its balance sheet. But it also has a more burdensome rent bill than larger rivals such as Travis Perkins and Grafton, with lease liabilities of £742 million at the end of December.
Wickes’ profit warning should prove instructive for shareholders in Travis Perkins and Kingfisher, the latter of which is now the most-shorted stock in London. More profit warnings could be unleashed in the weeks and months ahead.
ADVICE Avoid
WHY Earnings could be hit by a further downturn
