Reckitt Benckiser was the latest consumer goods giant to warn of the pressures of mounting costs this week as its share price tumbled on inflationary concerns.
The Dettol and Vanish manufacturer’s first-half revenues were up 1.5% on a constant currency basis to £6.6bn, but it suffered a slowdown in the second quarter due to 2020’s pantry loading and a weak cold and flu season. Second-quarter sales were down 1.3% in constant currency and by 8.2% on a reported basis.
Despite the top-line slowdown, Reckitt’s bottom line was of more concern. Adjusted operating profit in the first half fell 16% (9.6% fall at constant currencies) to £1.4bn, while on a statutory basis it made a first-half loss of £1.9bn, driven by a near-£3bn charge from its agreement to sell its infant nutrition business in China and a £165m loss on the sale of its Scholl business.
Reckitt bemoaned the “increasingly challenging” environment for its soon-to-be-sold IFCN China business, but also pointed to accelerating cost inflation in the quarter.
Reckitt said this inflation will “take time to offset”, with productivity and pricing actions being set for the end of the year and 2022. In the meantime, it pulled back its forecasted adjusted operating profit margin to between 22.7% and 23.2% (40bps to 90bps lower than the 23.6% reported last year).
Shares slumped 8.4% to 5,020p on Tuesday and another 3.2% on Wednesday to their lowest level since the height of Covid concerns in March 2020.
AJ Bell said Reckitt’s problems reflected investor concern across consumer goods: “For years, the market has assumed big consumer goods companies had such strong brands it was easy to pass on any extra costs to the customer in the form of higher prices… With consumers increasingly flocking to cheaper own-label products, the idea the big brand owners are guaranteed sales success is no longer a given.”
Barclays said Reckitt’s forecasts of growth through innovation need to come to fruition, arguing: “[Reckitt] is firmly a ‘show me’ stock and is likely to receive little valuation credit until this comes through into organic growth.”
It was not all bad news for fmcg giants this week, though. The world’s largest food and drink firm, Nestlé, raised its full-year growth forecast after posting organic growth of 8.1% despite rising costs. The sales improvement was driven by volume growth of 6.8% and a 1.3% pricing increase, as prices edged up to reflect input cost inflation.
As a result, Nestlé raised full-year organic sales growth expectations to 5%-6%, though underlying trading profit margin is expected to fall back to 17.5% because of a delay in passing on cost inflation through pricing.
Coffee was the standout performer, with strong demand for the three main brands Nescafé, Nespresso and Starbucks, while it also saw double-digit growth in pet care, vegetarian and plant-based and confectionery, despite a further sales drop in infant nutrition.
Bernstein said the results represented “another very strong set of growth numbers” despite the acknowledgement cost inflation would hit margins. The broker said the margin guidance cut “hurts, but as expected is much smaller than Reckitt”.
Nestlé shares edged back 0.6% to CHF113.46 on the guidance.