Unilever juggernaut rumbles on after half-year results beat

Concerns that a cost-of-living crisis would damage sales of expensive food brands has proved wide of the mark. Our head of markets explains how latest results sent the shares to a two-month high.

The Unilever (LSE:ULVR)juggernaut rumbles on, sweeping aside any inflationary worries through the sheer scale of its pricing power.

There have been concerns that an increasingly cost-conscious consumer would switch to the cheaper, own-brand products of rivals, but this appears only to be happening at the margins. In normal circumstances, significant price rises would be accompanied by large declines in volumes as customers move elsewhere. For Unilever, however, with its suite of household names, this has simply not been the case.

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In the first six months of 2023, underlying sales growth (USG) for the group was 9.1%, driven by price growth of 9.4%, with just 0.2% of reduced volumes as a result. Unilever expects a moderate decline for the rest of the year and indeed second quarter USG reduced to 7.9%, ahead of the expected 6.4%. For the year as a whole, the group is guiding USG in excess of 5%, which itself represents an upgrade from its previous forecast.

The strength of this performance can be cut in a number of ways. By product, the 14 “Billion + euro brands”, which generate annual sales in excess of €1 billion and which account for 55% of group turnover, saw USG of 10.8%, driven by outperformance from the likes of Hellman’s, Omo, Sunsilk and Lux. By segment, Personal Care and Nutrition each saw USG of over 10%, with Beauty & Wellbeing, Home Care and Ice Cream adding 9.1%, 8.4% and 5.7% respectively.

The strength of the business model is also reflected by the group’s geographical reach. In Emerging Markets, USG of 10.6% was driven by price growth of 10% and an additional 0.6% boost in volumes, while in Developed Markets, a more moderate USG of 6.9% was due to price increases of 8.4%, slightly offset by volume declines of 1.4%.

The feared exodus of consumers following the price increases was also expected to hamper margins, but Unilever has reported that underlying operating margins have increased by 0.1% to 17.1%, ahead of the expected number of 16.4%. This may confound some detractors of the stock, with margin also improving from a continued focus on costs, where the group still expects €600 million of savings, the majority of which should filter through by the end of the year.

The group also recognises the importance of keeping its brands in the mind of consumers and has invested an additional €400 million in brand and marketing investment. At the same time, the dividend was maintained, leaving a respectable yield of 3.7% in place, and underpinned by the ongoing €3 billion share buyback programme, which is now three-quarters complete.

The combination of the measures which Unilever has taken led to underlying operating profit increasing by 3.3% to €5.2 billion, ahead of expectations of €4.9 billion. Net profit increased by 20.7% to €3.9 billion, helped along by a 2.7% increase in revenues to €30.4 billion for the half-year.

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The next stage of the strategy from the relatively new CEO is to simplify the operating model, while honing in on improved competitiveness and performance. This may take some time to wash through fully, but even so the group is maintaining solid momentum as it awaits the further streamline.

For investors, the jury remains out as signs of the strategy emerge, although today’s update provides a number of promising signs which has lifted the shares in early trade, adding to a price rise of just 3% over the last year, as compared to a hike of 5.1% for the wider FTSE100.

For many, Unilever will continue to be seen as a solid defensive play and a rightful core constituent of most portfolios, while also being held back by its reputation as a company with limited high growth prospects. This perception is one which the company needs to change and today’s reaction to the update could just mark a turning point. With Unilever’s valuation also being slightly lower than the historical average, the market consensus of the shares as a 'hold' could well be subject to an upgrade.