Unilever (NYSE: UL) on Oct. 13 posted third-quarter earnings results that kept the company squarely within management's financial goals for the year. However, there were signs in the report of growing headwinds in the consumer goods industry that could threaten the company's volume-driven expansion strategy. Let's take a look at Unilever's latest operating trends.
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What happened this quarter?
Organic growth of 3% was at the low end of the company's target range of 3% to 5% gains for the full year.
Other highlights of the quarter include:
- Unilever grew sales at its slowest pace in over a year, with gains falling to 3% this quarter from 5% in each of the prior three quarters. Additionally, organic growth came entirely from price gains as volume declined slightly and prices rose by 4%. These figures kept Unilever ahead of rival Procter & Gamble (NYSE: PG), which is aiming to expand at a 2% pace this year.
- The company's segments are growing faster than their corresponding markets.Unilever boosted market share in each of its four product categories, with the strongest growth coming in home care. The food business posted the weakest growth pace, but still had healthy market-share gains.
- Geographically, sales growth sped up in the key U.S. market, was flat in Europe, and slowed in Asia and Latin America due to challenging economic and competitive conditions.
What management had to say
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"Our business continues to demonstrate its resilience by growing competitively and consistently in tough market conditions," CEO Paul Polman said in a press release. "This was driven by strong innovations in support of our category strategies." As an example of these innovations, management cited the expansion of the Hellmann's mayonnaise brand into the popular organic segment and with the addition of new flavors like wasabi.
USG = underlying sales growth. Image source: Unilever investor presentation.
Executives didn't have much encouraging news to report on the industry's growth pace, though. Markets are still "soft and volatile," Polman said. Overall, "consumer demand remained weak and in the markets which we operate volumes have slowed further and are flat in aggregate," he explained. In an investor presentation Unilever noted that consumer confidence has declined through the year, and that slump is likely pressuring sales volumes.
The company reiterated its full-year growth target calling for roughly 4% organic growth. That seems achievable, given the gains in the first three quarters of the year.
Meanwhile, investors can look for Unilever to ramp up its cost-cutting initiative over the next few quarters in a bid to boost profit margin even if overall sales remain flat. Unilever is happy with the bolt-on acquisitions it has recently made, including Dollar Shave Club, Blueair, and Seventh Generation, and thus more of these types of purchases could be on the way.
As for a growth turnaround, it isn't showing up in the data yet. In fact, further slowing could be in the cards. Sales volume figures will be key to watch over the coming quarters since higher prices won't be enough to keep organic growth chugging higher. Unilever aims for "volume-driven" expansion, and that didn't happen this quarter.
Still, the company is on track to hit management's broad targets of market-share growth, improved profitability, and strong cash flow even as it navigates a volatile, weakening global industry.
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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter and Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.