ii view: Unilever shares dive on sales warning

South Asia, West Africa and North America are all dragging on sales growth. Where now for investors?

Trading update

Guidance: 

• Expects underlying sales growth for 2019 to be slightly below its guidance of the lower half of its 3-5% multi-year range
• Earnings, margin and cash are not expected to be impacted
• Expect first half 2020 growth will be below 3%

Chief executive Alan Jope said:

"Due to challenges in certain markets, we expect a slight miss to our full year underlying sales growth delivery.

"Looking ahead to 2020, growth will be second-half weighted.  While we expect improvement in H1 2020 versus this quarter, we expect that first half growth will be below 3%. Our full year underlying sales growth is expected to be in the lower half of the multi-year range.

"Growth remains our top priority and we are confident we have the right strategy and investment in place to step up our performance."

ii round-up:

In a short but unexpected trading update, consumer goods giant Unilever (LSE:ULVR) warned that sales growth for 2019 is now expected to fall below its prior estimate of the lower end of 3 to 5%. 

Blame for the sales miss was attributed to the economic slowdown in South Asia, one of its biggest markets, still difficult trading conditions in West Africa and improving but challenging trading in North America.  

The share price fell by over 6% in UK market trading. 

Earnings, profit margin and cash are not expected to be impacted.

Sales growth in the first half of 2020 is also now expected to fall below 3%. Full year 2020 underlying sales growth is expected to be in the lower half of its multi-year 3 to 5% range.

Broker Morgan Stanley noted that, “Prior to this quarter Unilever had reported 12 quarters of sub 4% like-for-like growth, with this update through to the second quarter of 2020 they will have reported 15 quarters of sub-par growth.” 

Unilever is scheduled to report its fourth quarter and full-year 2019 results on 30th January 2020. 

ii view:

Unilever is considered to be defensive in nature. The type of products it sells are regularly on the shopping lists of consumers globally. However, recent years have not been all plain sailing. Wage-squeezed consumers have often been turning to cheaper non-branded goods and discount retailers like Aldi only stock non-branded goods. 

Third-quarter mid-October 2019 trading saw management flagging softening growth in India and slower if only marginally lower growth in China. Expected sales growth in the Emerging Markets is not to date fully compensating for still challenging conditions in developed markets such as North America and Europe. 

For investors, a prospective dividend yield of around 3% is not unattractive in the current ultra-low interest rate environment. But earnings estimates going forward may now be cut, while a forward price/earnings (PE) ratio of around 20, broadly in line with both the three and 10-year averages, doesn't scream value. That said, Unilever has a strong record of recovering from setbacks and its shares will likely remain a staple in many investor portfolios. 

Positives: 

• Provides diversity in both product type and geographical location
• A focus on emerging markets
• Defensive qualities in uncertain times

Negatives:

• Lowered sales estimates
• It has on occasion found itself being investigated by competition authorities
• Discount retailers often only stock their own branded labels

The average rating of stock market analysts:

Strong hold