Why did the Unilever share price plummet this week?

The Unilever share price plummeted this week. Zaven Boyrazian takes a closer look at what’s been causing this recent volatility.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The Unilever (LSE:ULVR) share price has had a rough week. After publishing its latest trading report, it seems investors were less than impressed, which led to a 6% decline within 24 hours. That’s certainly not as volatile as some other stocks out there. But for a blue-chip consumer goods business, that’s a significant fall. So, what actually happened? And is this an opportunity to buy shares for my portfolio at a discount? Let’s take a look.

A seemingly decent half-year report

Despite what the fall in the Unilever share price might suggest, the half-year trading update was far from terrible. At least, that’s what I think. The underlying sales growth compared to a year ago beat analyst expectations, coming in at 5.4%.

Most of this was attributable to its rapidly expanding e-commerce channel, which grew by a further 50%. Its online sales remain a small portion of the overall revenue stream (around 11%), but they are important. So much so that the management team stated, “we are confident that we will deliver underlying sales growth in 2021 well within our multi-year framework of 3-5%”.

Meanwhile, its latest acquisitions within its Beauty & Personal care products also appear to be paying off. The firm had recently added Paula’s Choice to its portfolio, among others. Collectively these contributed a 1.4% boost in total turnover despite the adverse effects of currency exchange rates. To me, this sounds quite promising. So why did the Unilever share price fall?

The falling Unilever share price

As encouraging as this sales performance is, there continues to be mounting uncertainty from investors surrounding inflation. This is something I’ve previously explored when discussing Tesco. Because governments worldwide are issuing enormous stimulus packages to reboot their economies, the level of inflation is on the rise. As a consequence, the prices of raw materials are up too.

Unilever has already started feeling the pressure from this.  In fact, due to the rising prices of raw material commodities and logistical distribution costs, the firm’s profitability has started taking a hit. Its operating margins fell by 1%. And it seems that as inflation ramps up, this impact will only intensify.

The firm will more than likely start passing on these higher costs to consumers. However, doing so may impact sales growth as people look to cut down on spending. Needless to say, if either profits or sales are adversely affected by inflation, the Unilever share price could continue its downward trajectory.

The Unilever share price has its risks

The bottom line

The rising level of inflation is a concerning factor that will likely impact the entire consumer goods industry. However, the Bank of England expects that inflation levels will fall back to normalised levels in 2022 as the post-pandemic boost begins to slow.

If it is correct in this assumption, it means that this dip in profitability is ultimately a short-term problem. Therefore, to me, the recent collapse of the Unilever share price does look like a buying opportunity for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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