Unilever readies for inflation surge due to tariff flux - how does it influence investors' decisions?
Unilever and other major food manufacturers grapple with mounting inflationary pressures that are compelling adjustments in their business operations and affecting sales and profitability.
According to Fernando Fernandez, Unilever's CEO, the company is experiencing a resurgence of commodity inflation in certain raw materials. However, the impact is supposedly minimal, affecting only a few categories of materials. The emphasis on localized supply chains, as per Fernandez, should limit the direct impact of Trump's tariffs on Unilever's sales, although it won't alleviate the increasingly challenging macroeconomic situation in the firm's primary market.
Food producers, including competitors such as Nestlé, are also concerned about dimmer economic conditions in the US and elsewhere. Several companies, including PepsiCo and Procter & Gamble, have already reduced their outlooks for the year due to tariff uncertainty, while consumers might struggle to accept further price increases given the cost pressures they already face.
Despite dealing with a cornucopia of headwinds afflicting the retail sector, Unilever seems to be faring better than several of its competitors. Unilever managed a steady 3% growth in underlying sales during Q1, keeping it on course to achieve its full-year sales growth target of 3-5%. This strong performance is attributed to Unilever's strategy of focusing on its top brand names and trimming lesser-known brands, a move expected to yield significant savings and reduce margin pressure.
Mark Crouch, from eToro, considers Unilever more resilient than its counterparts, while making steady progress towards creating a leaner, more resilient organization. However, Russ Mould from AJ Bell advises against overoptimism regarding Unilever's performance, arguing that while the sales growth exceeded expectations, the figures were far from exceptional. Shareholders may have to exhibit patience, according to Mould, as slower growth often denotes a steadier strategy.
Analysts like Matt Britzman from Hargreaves Lansdown highlight Unilever's resilient results, with the gross margin reaching its highest level in a decade. Unilever maintains its status as an attractive quality business with robust fundamentals. If the planned cost cuts and ice cream business spin-off can be executed seamlessly without causing turmoil, achieving consistent mid-digit sales growth should be within Unilever's reach, boding well for the stock in the current valuation environment.
- To mitigate the effects of increasing inflation and uncertain tariffs, Unilever is focusing on creating savings through the trimming of lesser-known brands, aiming to maintain a steady growth and remain financially resilient.
- As Unilever's strong performance in Q1 indicates, the company's strategy of investing in top brand names and reducing costs could potentially position it to achieve mid-digit sales growth, making it an attractive quality business in the current economic climate.
