Unilever Earnings: Volumes Ahead Despite Solid Pricing, but Market Share Lags

Unilever ULVR reported solid sales growth in the first half at 9.1%, ahead of company-compiled consensus of 8.3%, with volumes and pricing driving the beat (volumes down 0.2% versus down 0.7% for consensus, pricing up 9.4% versus up 9% for consensus). Management upgraded fiscal 2023 organic growth guidance to higher than 5% versus the upper end of its 3%-5% medium-term range previously, 6.1% for consensus (prerelease), and 6.7% in our updated model. The underlying operating margin was higher at 17.1% versus consensus’ 16.2%, with Unilever continuing to expect a modest improvement for the full year (up 37 basis points in our model). Net material inflation for 2023 is about EUR 2 billion, of which EUR 0.4 billion is expected in the second half, implying a significantly lower need for price rises in the second half (up about 3.5% in our model).

All in all, another strong half-year and second-quarter print, with volumes stabilizing sequentially despite solid pricing. However, in line with our commentary in the first quarter, we’re cautious about some of Unilever’s categories that are experiencing elevated competition from private-label and down-trading activities. In fact, the percentage of the group winning market share over the last 12 months decreased to 41% (versus a target of more than 50%), which according to the firm is the result of a 17% stock-keeping unit reduction, pricing dynamics, and consumer shifts in certain markets. Although this disappointing figure is partially self-inflicted (through a vast SKU reduction), there are elements of higher competitive intensity from lower-priced brands and private-label products, especially in categories that are less brand-driven and more discretionary in nature. Given the better-than-expected top-line performance and guidance, we’ve increased our 2023 organic growth estimates, which in turn have resulted in a small increase in our fair value estimate for Unilever to EUR 52/$57/GBX 4,450. Shares are slightly undervalued.