Danone’s 6.9% like-for-like third-quarter growth reported this morning comfortably beat expectations, but the headline figure potentially hides some more worrying trends.
The organic revenue growth beat consensus expectations of 5.8% and the shares subsequently jumped almost 5% in Paris.
But Danone’s share price fell back during the day to end trading flat (0.3% up to €50.64) as market concern centred on exactly where the growth had come from.
The primary driver of the like-for-like sales boost was a startling 19.2% growth in Early Life Nutrition. The worry is that this growth was only achievable because of uniquely easy comparatives in Asia, where the Fonterra product recall over fears of tainted ingredients cut into 2013 revenues.
Danone’s comment that the segment’s “sales in these markets [were] almost back to pre-crisis levels” suggests that it is only pulling back a proportion of lost revenues.
Also of concern was the performance in its Fresh Dairy segment, which came in at like-for-like growth of 0.7% (below consensus estimates of 1.1% growth). Western Europe sales in the segment fell by 5%, while growth in Russia and the US tapered off.
“The headline looks strong, but the figures behind are somewhat less thrilling,” concluded analysts at Bernstein.
The broker added: “There may be a slight positive stock reaction, based almost on relief, but we would not see these results, especially the poor Fresh Dairy growth, as evidence that Danone has turned a corner.”
Danone did restate its full-year 2014 targets of 4.5%-5.5% organic sales growth and margins +/- 20bps LFL, but analysts at Jefferies said: “Profitability is under pressure and we see downside risk to margins (Jefferies’ FY-14 forecast: -50bps yoy)”.
The weakness in dairy looks to be only partly explicable by falling prices across Europe and the US.
As Jefferies notes, prices are rising in Russia and Latin America, suggesting there are more fundamental performance issues than temporary price movements. The broker said Danone may require more product and strategy investment to stimulate the category, “which in turn would limit hopes for margin recovery”.
Danone shares are slightly down year to date (-3%) and have fallen 8% since early September.
Despite today’s strong sales growth, investors will need more proof of sustainable progress before that trend is reversed.