Unilever, Nestlé Test Investor Patience With Slower Sales -- Update
Two of the world's biggest consumer goods companies--both caught in investors' crosshairs--reported another round of weak sales, ratcheting up pressure to accelerate promised turnarounds.
Unilever PLC missed analysts' sales forecasts by a wide margin, Thursday, reporting growth in the third quarter of 2.6% compared with a year earlier. Analysts had expected the maker of Dove soap and Hellmann's mayonnaise to post sales gains of 3.9%, stripping out things like acquisitions and divestitures. Shares were down more than 4% in London afternoon trading.
Nestlé SA, meanwhile, said sales weakened in the first nine months of the year, and it doesn't expect an improvement in the final quarter. The Swiss consumer giant reported sales growth of 2.6% for the first nine months of the year. It said it was on track to post 2.6% growth for the full year, too, compared with 3.2% last year.
The owner of Kit Kat chocolate and Nescafé coffee also said it would take new restructuring charges of 400 million to 500 million Swiss francs ($410 million to $512 million) this year, as it accelerates efforts to cut out longer-term costs. The charge will eat into full-year profit margins. Nestlé shares were down 0.6% in London.
For both companies, the clock is ticking. Investors across the sector have called for significant changes at many of the industry's largest players. The revolt is playing out amid a sector-wide downturn blamed on fast-changing buying habits by consumers world-wide.
Earlier this year, Unilever rejected a $143 billion bid by Kraft Heinz Co. It acknowledged in the aftermath that it needs to do more to keep shareholders happy--and to keep itself off the target list of other potential acquirers.
It promised to boost returns through share buybacks, higher profit margins and a fresh willingness to leverage the balance sheet. It also put its margarine business up for sale. Under Chief Executive Paul Polman, Unilever has already been cutting costs sharply.
Thursday's disappointing sales set up a fourth-quarter sprint for Unilever to make its full-year forecast of 3% to 5% growth. RBC analyst James Edwardes Jones said that target would be "a stretch," given its performance so far this year. He also said Unilever's ability to achieve a margin target of 20% by 2020--one of the things it promised investors after the Kraft Heinz bid--will be "jeopardized" if the company can't step up sales growth.
Unilever relied heavily on price hikes for third-quarter growth, instead of volume growth, a red flag for analysts. Some investors showed signs of impatience. Simon Gergel, chief investment officer for U.K. equities at Allianz Global Investors, a big Unilever shareholder, said that with the weak sales volume growth "there could be questions raised about the sustainability" of Mr. Polman's strategy prioritizing cost-cutting and profit margin increases.
Unilever's two biggest competitors, Procter & Gamble Co. and Nestlé , are already under pressure from activist investors. Nelson Peltz narrowly lost a proxy vote at P&G, and has called for deep structural changes at the U.S. giant. So far, Mr. Polman has avoided that sort of public pressure, but it is far from clear that he can do so indefinitely. He has also so far resisted some of the bigger structural changes that some critics have said are necessary--like splitting Unilever's food holdings and its consumer-goods brands.
Crosstown rival Reckitt Benckiser Group PLC, earlier this week, said it would split its own businesses--creating a consumer health group and a home-and-hygiene group--to focus management on boosting growth at both units.
Nestlé, meanwhile, is busy trying to keep its own activist investor at bay. Dan Loeb's Third Point is now one of its biggest shareholders. Nestlé CEO Mark Schneider, who took over earlier this year, has already done a number of things Mr. Loeb has asked for: He set a profit margin target, launched share buybacks and has used deal making to diversify Nestlé's portfolio--away from slower-growing packaged snacks and toward smaller, faster-growing brands. Mr. Schneider also put Nestlé's U.S. chocolate business up for sale.
If Nestlé can't show signs of a turnaround, Mr. Loeb--or others--may increase pressure for bigger moves. A spokesperson for Mr. Loeb declined to comment Thursday.
Both companies have turned to the deal table, though they have so far eschewed the big, transformative moves that were a hallmark of the industry in the past. Through big acquisitions, P&G, Kraft, Unilever and Nestlé all built themselves into packaged-goods powerhouses. In previous downturns, innovation and marketing were typically enough to stoke flagging sales. Today, with consumers looking for healthier or more local brands, those big deals don't seem as obvious a fix.
Since August, Unilever has agreed to buy niche brand Weis ice cream in Australia; Pukka Herbs, an organic tea brand, in the U.K.; Carver, a premium skin care brand in South Korea; and Mae Terra, an organic packaged food brand in Brazil. Nestlé has snapped up plant-based food maker Sweet Earth and acquired stakes in artisanal coffee chain Blue Bottle and delivery service Freshly.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Brian Blackstone at brian.blackstone@wsj.com
(END) Dow Jones Newswires
October 19, 2017 09:34 ET (13:34 GMT)