Unilever's Q2 Earnings & Sales Rise Y/Y

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This fast-moving consumer products giant Unilever N.V. (UN) posted solid second quarter 2013 results. The company???s core earnings per share increased 3.6% to EUR 0.76 (99 cents per share), driven by organic sales growth and operating margin improvement. However, these were partly offset by currency headwinds and slightly higher interest rates. On a constant currency basis, earnings increased 7% in the second quarter.

The company recorded underlying sales growth of 5.0% (in local currency) in the second quarter. The increase was driven by underlying volume and pricing gains of 2.6% and 2.3%, respectively. Increased investment in innovation, improved product quality and expansion of brands to new markets contributed to the top line growth.

The company???s recent launches like Axe Apollo deodorant and the continued success of TRESemm??, Dove Men+Care as well as Clear hair products showed the benefits of rolling out strong global innovations across multiple regions.

The company???s underlying sales increased 10.3% (in local currency) in the emerging markets. However, it was lower than the last quarter, as the company is witnessing sluggish growth in the markets of Brazil, Russia, India and China. Weaker exchange rates, particularly in Brazil, India, South Africa, Argentina and Indonesia, hit the company???s sales in the quarter. Sales in the developed markets also remained sluggish due to global macroeconomic headwinds.

Unfavorable currencies also led to a rise in commodity costs as it affects the price paid in local markets. Unilever expects low- to mid-single digit inflation for the year as a whole.

Segment Details

Unilever witnessed strong market share growth in Home Care and Personal Care categories. The Foods category improved from the last quarter but still remains sluggish due to weak performance of spreads, which offset the impressive performance in savory and dressings. The company???s low-cost business model in the Home Care and Refreshments categories resulted in significant improvement in operating margin during the quarter.

Investments

During the second quarter, the company increased its stake in its Indian unit Hindustan Unilever to 67.3% from 52.5% by acquiring 15% of the outstanding shares for a total of EUR 2.45 billion in order to strengthen its position in the emerging markets.In Pakistan too, the company has so far acquired over 20% of its outstanding shares, taking its shareholding above 97% through an investment of around EUR 350 million. We believe that with these investments, the company will be able to gain more from the attractive markets of India and Pakistan.

Overall, we are optimistic about Unilever???s wide portfolio of brands, which helps it to maintain a dominant share in the market. Unilever has been strengthening its portfolio by expanding through a number of acquisitions.

Further, Unilever has been divesting its businesses to shed its non-core operations, thereby optimizing resources and allocating them to more promising markets. Most recently in Jan 2013, Unilever agreed to sell its Skippy peanut butter business to Minnesota-based meat producer Hormel Foods Corporation (HRL). Last year in August too, the company sold its North America frozen meals business (brands of Bertolli and P.F. Chang) to ConAgra Foods Inc. (CAG).

However, we remain concerned about the uncertain macro-economic environment, particularly in Europe. Though the company forecasts volume gains and strong free cash flow in the near-term, commodity cost inflation will continue to be a headwind. Unilever holds a Zacks Rank #4 (Sell).

However, you can consider B&GFoods, Inc (BGS), which is currently doing well and holds a Zacks Rank #1 (Strong Buy).

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