The-fast moving consumer goods (FMCG) group reported higher-than-expected underlying sales growth in the second quarter, but what hit the shares was a cut to full-year operating margin forecasts. This change was due to rising costs.
It seems like Unilever is struggling to pass on cost increases to its customers. If rising inflation remains an issue, this could increasingly worry investors.
It has other issues too. Lately, an argument between Ben & Jerry’s — the ice cream brand that Unilever owns — and the state of Israel has put Unilever in a tricky situation. It comes after Ben & Jerry’s decided to stop selling ice cream in Israeli settlements in the occupied Palestinian territories. It remains to be seen what action Israel supporters in the US make of this move and what effect it has on parent company Unilever. The situation highlights one of the challenges of having different brands and company cultures under one umbrella, as Unilever does.
Why the ULVR share price could keep struggling
The latest trading announcement wasn’t the first time investors have been disappointed with an update from Unilever. Last year it reported turnover that was down 2.4% to €50.7m. Margins have also fallen for three years consecutively. It’s been hard for investors to see where sustained growth might come from.
However, on the plus side, there could be a bounce-back in its giant healthy & beauty category, which accounts for about 40% of Unilever turnover. That could help the shares. This part of the group underperformed during lockdown, as customers couldn’t go out. That created less demand for make-up, for example.
There’s a feeling that perhaps consumers increasingly want to buy more independent brands rather than the mass produced ones that Unilever specialises in. Acquisitions in the beauty industry are testament to this. This could partly explain why growth has been sluggish for a while and why the Unilever share price has struggled.
I might be wrong…
There’s always a chance that the shares could bounce back. Unilever may be able to cut costs to improve margins or find a way to either grow sales volumes or increase those margins. Management doing any of this would likely please shareholders and this could see the share price rise.
Unilever has strong brands, global sales, marketing know-how and a proven business model. It’s held by many professional fund managers, including the successful Nick Train. That suggests full-time investors think Unilever is a good business.
The group is on track with selling its tea business. This divestment could mean it can spend more on marketing products with better sales growth potential and margins. That could boost shareholder returns in the future.
Overall I think the ULVR share price will keep on falling, however. I’m avoiding the shares and think there are better opportunities in the UK – and indeed within the FTSE 100.