Nestle Deals With Slow-Growth Pressures

Image source: Nestle investor relations.

Swiss food giant Nestle (NASDAQOTH: NSRGY) plays a key role in its industry both in the U.S. and worldwide. With products ranging from chocolate to frozen food, Nestle is a well-diversified company that caters to the needs and wants of people across the globe. Yet coming into Thursday's release of its first-half results for 2016, Nestle investors were prepared to see more evidence that the company has struggled to maintain its pricing power as a result of deflationary environment across many developed-market economies in which it has a major presence. Nestle did manage to grow its sales and adjusted earnings, but the pace of that growth was fairly slow, showing that the food specialist has more work to do in order to regain its past momentum. Let's take a closer look at how Nestle has done and what it wants to accomplish to get back on track.

Nestle produces lukewarm results

Nestle's first-half results were solid if somewhat uninspiring. The company reported revenue of 43.2 billion Swiss francs, which was up less than 1% from the previous year's first half. In dollar terms, that translated into a sales decline of nearly 3% to $44 billion thanks to the strengthening in the U.S. dollar. Even though organic sales growth worked out to 3.5%, investors had expected slightly faster growth rates. A one-time tax impact hit profit hard, resulting in a decline of 9% in local-currency terms and working out to $4.18 billion. Yet after adjusting for the charge, adjusted earnings in constant currencies rose by 5.7%, and that was slightly better than the consensus forecast among those following the stock.

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Looking more closely at Nestle's results, the deflationary pressures hitting much of the world were evident in the food giant's numbers. Real internal growth amounted to 2.8%, but the company was only able to get a 0.7% boost from pricing. Low commodity prices have also held Nestle's top line down, although that trend also kept the company's input costs down, helping to boost its net income. Deflation was especially evident in developed markets, where Nestle only posted organic growth of 1.9%, but emerging markets enjoyed stronger growth rates in excess of 5%.

A closer look at Nestle's corporate divisions shows more of the disparate performance across geographies and product categories. Organic growth in the Americas was 5.1%, with Latin America providing more pricing power while North America concentrated on success in the frozen meals business. Pricing had a negative impact on the Europe, Middle East, and North Africa segment, even though organic growth of 2.6% was still fairly solid given the tough environment. The Asian region had the best performance in terms of operating profit margin, even though organic growth lagged slightly behind its two counterparts. Solid growth in the company's water division offset sluggish performance in nutrition, where Nestle posted gains of just over 1%.

Outgoing CEO Paul Bulcke noted that Nestle's results were in line with the company's expectations and said that volume gains led to increased market share. "In these times of rapid change," Bulcke said, "we keep our focus on profitable growth by further investing in innovation, R&D, brand support, and digital to engage with our consumers, meeting their changing needs."

Can Nestle return to faster growth?

Looking forward, even the sluggish performance didn't stop Nestle from confirming its outlook for the full year. The company believes that organic growth will eventually match its 2015 performance, and improved margin and earnings per share in constant-currency terms should give shareholders the results they want to see.

Yet it's clear that Nestle will need a change in strategic direction in order to reawaken its full growth potential. The appointment of incoming CEO Ulf Mark Schneider to replace Bulcke as of the beginning of 2017 should set the stage for a bigger push into the nutrition and health fields. Investors are hopeful that if opportunities in those areas pan out, they could help Nestle's growth accelerate back into the 5% to 6% that many see as a reasonable long-term target.

Nestle shareholders seemed content with the report, sending the stock up by about 1.5% both in Europe and in U.S. trading following the announcement. Nestle's brand awareness worldwide is strong, and that should help in its efforts to broaden its product base and serve more of the needs of its customers in the future.

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