Consumer goods giant Unilever PLC (NYSE:UL) reported a huge increase in second-quarter profits on less impressive sales growth. Its sales volume growth was challenged by declines in product prices, emphasizing the difficult climate for consumer staple stocks.
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Robust Profits on Small Sales Volume Increase
Unilever net income rose by 40% to $1.4 billion in the quarter. This was achieved largely by cost cutting and favorable currency exchanges. Sales increased by 12.4% to $15.5 billion, but if currency exchanges are subtracted in addition to acquisitions and divestitures, sales volume increased by 5.7%. A further factor was the 2% price declines, which would reduce the underlying sales figure to a 3.6% increase. Unilever is facing the same difficult consumer climate that other similar companies are facing.
Growth in Emerging Markets
Asia, Africa and Central Eastern Europe segments showed sales increases of 8.2%, while revenue in the Americas grew by 3.9%, and slumped in Western Europe by 2.2%. The personal care segment grew 7.8% with home care up 2.2%. Ice cream and beverages rose by 3.5%, while spreads and dressings grew 0.5%.
Consumer Products Issues
The major consumer products companies such as Unilever, Colgate-Palmolive (NYSE:CL), Kimberly-Clark (NYSE:KMB) and others are not only competing with each other's strong brands, but also against generic, lower-priced competition.The consumer's now well-established resistance to pricing has affected all the major consumer products companies. Colgate had these issues in its latest earnings report, while Church & Dwight (NYSE:CHD) cited the effects on margins this is having. The lower prices together with the higher advertising and promotional costs have chipped away at revenue for many in this sector. Even an examination of the quality of cash flow sources for Clorox (NYSE:CLX), for example, show that as an area which should be scrutinized more carefully in this economy.
Economy and Competition Continue
The battle over consumer products dollars from customers will continue to be intense. The slow economic recovery and the unwillingness of consumers to initiate more spending is an over-arching factor for the sector. Unilever, however, with its scale and its powerful balance sheet - it had $4 billion in net cash and equivalents at the end of the quarter with $9 .97 billion in net debt, should continue to hold its own. The company also has strong brands and is well positioned in its main segments such as food and personal care, and has a global reach. The difficult environment aside, the earnings growth estimates which are still projected above 10% for the next two years, should they hold up, are more than acceptable.
The Bottom Line
The company currently pays a 4% dividend, and the stock is trading at the lower end of its 52-week price range, so it's not bad on that basis. Unilever can be a steady, slow-grower with income for investors. (For more stock analysis, see Big REIT Dividends.)
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