Reckitt Benckiser shares crash to March 2020 prices

The consumer goods giant's shares have already fallen sharply from post pandemic highs, and today's results have not been taken well.

The costly exit from the Infant Formula and Child Nutrition business in China (IFCN) is the unfortunate highlight of Reckitt Benckiser's (LSE:RKT) half-year results.

Reckitts has been forced to recognise a £3 billion loss on the disposal against fair value, while an extra £165 million arising from the Scholl sale is an additional thorn in the side to the numbers. Set against this strategically, the recent £780 million acquisition of Biofreeze allows an entry into the topical pain treatment category, for which the company has high hopes for geographical expansion and innovation.

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The operating loss of £1.8 billion is therefore of little surprise, with net revenues also drifting by 4.5%. Operating profit margin also declined by 2.9% to 21.6%, as a result of planned investments, cost inflation and an adverse margin mix. In addition, the Health business is suffering in comparable terms, as the numbers lap a period of “pantry loading” last year.

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In terms of the immediate outlook, the company is also anticipating a difficult third quarter against tough comparatives, with some improvement in the final quarter.

More positively, the Hygiene business, which now accounts for 46% of revenues, is showing strong growth, especially in North America. The Dettol and Lysol brands alone are now responsible for a quarter of revenues (from 16% pre-pandemic), with two-year growth at 34.1%.

Of course, general attitudes to hygiene have now altered globally and the likelihood is that this new awareness is now here to stay. This will benefit Reckitts in achieving its longer term objectives, with the bonus of increased sales of minerals, vitamins and supplements also providing a shorter-term boost. In addition, the company has a strong innovation pipeline given the levels of its Research and Development investment, and its very size and reach into many markets gives it something of an edge in volume and pricing.

The group is also seeing the benefit of growth in its eCommerce business, which now accounts for 12% of group revenues and which has seen growth of 95% compared to pre-pandemic levels. This gives Reckitts further flexibility in delivering its vast array of products in a constantly evolving environment.

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While the stock held up well during the pandemic given its defensive nature, the spectre of the IFCN business loss and a transformation carrying execution risk, has weighed heavily on the shares more recently. Even prior to today’s negative reaction to the numbers, the shares had seen a decline of 19% over the last year, as compared to a gain of 15% for the wider FTSE100 index.

However, Reckitts is still seen by many as a core portfolio constituent, with the market consensus of the shares as a 'strong buy' reflective of a company still being seen as one generally trending in the right direction.