Unilever's rising costs remain a concern
The consumer goods giant's emerging markets operations helped drive sales growth.
Nonetheless, the consumer giant continues to face persistent headwinds from stubbornly high commodity costs, particularly crude oil and vegetable oil.
Unilever began the year targeting a modest operating margin expansion and still hopes to get some respite from the easing of commodity prices toward the second half of the year. Unilever is the second largest consumer goods company globally after Proctor & Gamble (PG).
Emerging markets lead sales growth, developed markets still depressed
Unilever reported an underlying sales growth of 8.4% for the quarter, balanced between volume (3.5%) and price (5%), particularly from its emerging markets and with double digit growth in personal care and home care categories. The acquisitions of popular personal care brands of Alberto Culver and Concern Kalina (Russia) in 2011 also contributed 3% to sales growth, leading to a 12% increase in overall sales.
While consumer demand remained healthy in emerging markets, the results revealed continued weakness and depressed consumer spending in developed markets. Unilever noted that the average European household consumption continues to decline; 45 million Americans still claim benefits via food stamps; and eurozone unemployment is in double digits.
Cost headwinds continue
Unilever's input cost scenario continues to remain bleak with higher crude oil and vegetable oil prices this quarter than previously anticipated. The company now expects commodity cost inflation for 2012 to be higher than the mid-single-digit increase expected at the beginning of the year. Unilever absorbed 2.4 billion euros of commodity inflation in fiscal 2011.
It targets a modest improvement in core operating margin for 2012, but given the current worsened cost climate, this looks challenging. However, it still expects some improvements toward the second half of the year.
The company is likely to resort to incremental pricing in emerging markets to achieve its target of modest operating margin expansion. However, it might avoid further pricing increases in developed markets that are already dealing with weak volume growth. Any more pricing hikes there might result in market share loss.
The outlook for Unilever's food business will be most challenging given the weak demand scenario in Unilever's core European and North American markets.
We are in the process of revising our $32.30 Trefis price estimate of Unilever stock.
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.