Unilever Sees Weaker Sales Growth Due to Emerging Market Slowdown

Second Biggest Advertiser in the World Gets 57% of Sales From Those Regions

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Unilever, the world's second-largest consumer-goods maker, said sales growth weakened in the third quarter amid a slowdown in emerging markets. The move sent shares down the most they've dropped in nearly two years.

Underlying revenue for the three months rose 3% to 3.5%, the maker of Lipton tea and Dove soap said in a statement after markets closed yesterday. That compares with 5% in both the first half and second quarter.

Paul Polman
Paul Polman

Unilever blamed the sluggishness on weak currencies in some developing countries, though repeated its full-year goals. The marketer gets about 57% of sales from emerging regions, making it susceptible to slowing economies in nations such as India and China.

In a sign that the slowdown is a key concern, this marks the first time the company has given quarterly sales guidance of any kind under Chief Executive Paul Polman. He did away with forecasts when he took the helm in 2009.

Drag Over Next Few Quarters

"We are concerned that emerging markets will continue to be a drag across consumer staples for the next few quarters," said Alicia Forry, an analyst at Canaccord Genuity in London. "Our numbers will need to be adjusted," said Ms. Forry, who had estimated 4% growth in third-quarter underlying sales.

Unilever shares fell as much as 4% in Amsterdam trading, the steepest intraday drop since Feb. 2, 2012. The stock was down 3.1% at $37.71 at 1:53 p.m., dragging the consumer peer group lower. Nestle SA, the world's biggest food company, slid as much as 1.5%, while brewer SABMiller Plc dropped as much as 4.1%. Procter & Gamble Co., the world's largest consumer-goods company, declined 2.1% to $75.59 in New York yesterday.

A slowdown in emerging markets accelerated "as a result of significant currency weakening," according to Unilever, which gets about three-quarters of revenue outside Europe.

Underlying sales growth strips out the effect of currency fluctuations, yet in countries such as Indonesia, Brazil, South Africa and India, weakening currencies have "squeezed local incomes," according to Sanford C. Bernstein analyst Andrew Wood. The resulting "inflationary pressure" has hurt demand, Liberum Capital analyst Pablo Zuanic said in a note today.

Unilever joins consumer companies including Adidas in saying that currencies are affecting growth. The world's second-largest sporting-goods maker last month reduced the lower end of its profit outlook because of currency movements and a distribution issue in Russia. Handbag maker Prada SpA said the euro's strength will weigh more heavily on full-year earnings after first-half profit missed estimates.

Slowdown Discussion

Mr. Polman has been discussing a slowdown in emerging markets for more than a year. In July 2012, he told analysts that growth rates in regions like China, Brazil and India were slowing and this year said it wasn't realistic to expect sales growth in those regions to be maintained after nine straight quarters of double-digit gains. Unilever's statement indicates that underlying sales in emerging markets rose about 6% in the third quarter, slowing from 10.3% in the first six months of the year, Nomura analyst Mark Howden said in a note.

Developed markets remain "flat to down," said Unilever, which is due to report third-quarter sales figures Oct. 24. Analysts including Bernstein's Mr. Wood had expected a recovery in mature markets such as the U.S. to offset the emerging-market slowdown, yet "this did not materialize," he said. Sales in developed regions fell 1.6% in the first half.

Estimates Cut

The "disappointing" growth in developed regions should prompt a "re-evaluation of Unilever's strategy," Panmure Gordon analyst Graham Jones said in a note.

Unilever continues to grow ahead of its markets and expects underlying sales growth to improve in the fourth quarter, Mr. Polman said in yesterday's statement, which was released before the company's participation in investor conferences this week.

"For 2013, we are still on course to deliver against our priorities of profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow," the London- and Rotterdam-based company said.

Nomura cut its estimate for Unilever's 2013 adjusted earnings per share by 6% to $2.03, while Panmure Gordon reduced its prediction by 1.3% to $2.06 euros.

Beyond the cuts to estimates, the "larger impact" of yesterday's news concerns Mr. Polman's credibility, Mr. Wood said. The announcement "does not create a feeling of comfort that Unilever has achieved the reliability, consistency and dependability that we had hoped for."

~Bloomberg News~

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