Unilever Scathed as Inflation Hits Consumer Goods Sector

Most of the sectors are impacted by the ongoing uncertain financial backdrop. Among others, the consumer goods sector had been hit hard by input cost inflation, resulting from the impact of the war in Ukraine on global markets and commodities. Though pandemic restrictions eased in most markets, the resurgence of COVID-19 imposed new restrictions and lockdowns, affecting consumers and operations. 

The rise in the cost of energy, packaging, and transport added fuel to the fire. Additionally, the repercussions of Russia’s invasion of Ukraine further raised the cost of inputs such as cooking oil and grains, along with energy. 

Therefore, consumer-goods industry players are transferring the burden to consumers in the form of price increases of products, bearing the brunt of a fall in volumes. 

Unilever Performance 

Among such industry participants, London-based consumer goods giant Unilever PLC (GB: ULVR) (NYSE: UL), withstanding surging inflation, disclosed that it had lifted the prices of products by an average of 8.3% in the first quarter of 2022 and has plans for further price hikes. 

Consequently, it experienced soft consumer demand, reflecting a 1% decline in overall volumes in the quarter. Overall, underlying sales growth came in at 7.3%. Interestingly, e-commerce sales growth represented 14% of sales. 

Segment-wise, quarterly Beauty & Personal Care sales grew 7.1%, while sales in emerging markets rose by 9.5%. Turnover jumped 11.8% to €13.8 billion. 

Low demand is expected from shoppers on a further rise in prices from the company, which is likely to occur throughout 2022, with competitive pressure, costs, and shoppers’ demand as factors in consideration. 

To combat inflation, along with rising prices, Unilever is switching to low-cost ingredients. This includes the reformulation of some of its products, which were using sunflower oil and now switched to rapeseed oil. During the first three months of the year, according to Unilever, prices of soybean oil had surged 33%, crude palm had jumped 32%, while aluminum prices grew 16%. 

Unilever CFO Graeme Pitkethly said, “Continued pricing will give rise to higher levels of volume decline over the course of this year.” 

Outlook 

Encouragingly, Unilever CEO Alan Jope said, “There is more to do as we navigate our business through unprecedented cost inflation, but we are making good progress. We are committed to sustaining this step-up in our growth and competitiveness.” 

Management expects input cost inflation of approximately €2.1 billion in the first half of 2022 and around €2.7 billion in the second half. 

For 2022, underlying sales growth is expected at the top end of the 4.5% to 6.5% range. Additionally, the operating margin for the first half is anticipated to land between 16% and 17%, while the full-year margin is expected to be at the low end of the range, given cost challenges. 

Wall Street’s Take 

Overall, the stock has a Hold consensus rating based on three Buys, seven Holds, and two Sells assigned in the past three months. The average Unilever price target stands at £3,891.12, putting the upside potential at 4.9% from current levels. Shares have lost 5% over the past six months. 

News Sentiment 

News Sentiment for Unilever is currently Neutral based on 21 articles written over the past seven days. 50% of the articles on UL have a Bullish sentiment, compared to a sector average of 63%, while 50% are Bearish, compared to a sector average of 37%. 

Ending Remarks 

Amid a challenging macroeconomic environment, surging inflation, price rise hitting demand volumes, cost challenges, analyst ratings, and cautious management outlook, investors might be wary before investing in Unilever. 

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