Unilever Q2 sales beat estimates, but costs bite into margins

Consumer goods conglomerate Unilever reported higher-than-expected underlying sales growth for the second quarter but cut full-year operating margin forecasts due to rising costs.

Underlying sales rose 5% in the three months to June 30, beating the 4.8% forecast, according to a company-supplied consensus.

First half turnover was flat at €25.8bn, while underlying operating profit fell to €4.8bn from €5.08bn. Underlying first-half margins fell to 18.8% from 19.8%.

The company said it now expected full-year underlying operating margins to be flat compared to slightly up earlier. The company in 2017 set a margin target for this year of 20%. Price rises accounted for sales growth of 1.3%, with the rest down to higher sales volumes.

“We have seen further cost inflation emerge through the second quarter. Cost volatility and the timing of landing price actions create a higher than normal range of likely year end margin outcomes. We are managing this dynamically and expect to maintain underlying operating margin for 2021 around flat," the company said on Thursday.

The maker of Hellmans mayonnaise and Magnum ice-cream has benefited from people stockpiling food and cooking more meals at home during Covid pandemic lockdowns as it cut back on marketing and store promotions, which boosted margins.

However, soaring commodity costs for everything from plastics to tea and nuts in the first half of 2021 have hampered ambitions to lift margins "slightly" from last year.

The company has also been in the spotlight over the decision of the group's American ice-cream brand Ben & Jerry's to stop marketing its products in the occupied Palestinian territories - a move that has sparked a backlash in Israel and threats of retaliatory action from Prime Minister Naftali Bennett.

AJ Bell investment director Russ Mould said the results highlighted limitations on the pricing power of the company’s brands "given it has not been able to pass on all of this extra cost to the consumer".

“The best Unilever can hope for is that it can keep operating margins flat for the remainder of the year," he said.

“However, the strong sales performance does show that the company is well positioned against the current backdrop with its combination of cleaning and hygiene products alongside comforting household favourites which we have all reached for during the pandemic."

“The surge in infections in the developing world is unhelpful to Unilever given its strong emerging markets footprint."