As one of the world’s biggest consumer goods manufacturers, Unilever is closer than many to the underlying trends in the buying behaviour of shoppers — and when it reported on trading over the first quarter last week, its chief executive was clear in his view that there would be changes in the wake of the coronavirus.
Alan Jope cited a probable greater emphasis on products that supported improved health and hygiene, as well as an acceleration of the already advancing move by consumers online to buy their goods. The Unilever boss argued that big brands of the kind that his company produces do well in a crisis because they are trusted. That may be so, but it’s debatable whether the long-term trends will play out as he foresees it.
As a group, Unilever is not short of household-name brands. Its history dates back to 1871, when the Jurgens family in the Netherlands bought the patent to make margarine. It became the modern Anglo-Dutch group in 1929 when Lever Brothers, a British soap maker, merged with what by then had become Margarine Unie.
The FTSE 100 company, whose London listing values it at more than £105 billion, has three divisions that produce more than 400 brands, made and sold by 150,000 employees and shipped to 190 countries. The two biggest units are beauty and personal care, including Dove soap and Sunsilk shampoos, and food and refreshment, which is behind Magnum ice creams and Knorr stock cubes and gravy. The third is homecare, with brands such as Cif and Domestos in the cupboard.
While it’s tempting to conclude that Unilever will be a clear winner from Covid-19, as consumers buy detergents and seek comfort in Marmite and Hellmann’s, the reality is far more mixed. Sales of its ice creams, including Wall’s and Ben & Jerry’s, will have all but dried up because of restrictions on movement. Demand for Unilever’s products from restaurants, caterers and other businesses has fallen away since February. Sales to emerging markets, where for many stockpiling is not an option and where the virus outbreak is still in its infancy, will be hit.
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The net short-term result was that group underlying sales growth in the first quarter was non-existent, against a rise of 3.1 per cent over the same period last year. Underlying sales in beauty and personal care barely moved, were up modestly in homecare and fell in food.
Covid-19 came at a bad time for Unilever, which was finally making progress revitalising its stable of brands, some of which were beginning to look a little tired. Having reported annual underlying growth in sales of 2.9 per cent for each of the past two years, investors were hoping for success with the company’s aim for this year — now abandoned — of reporting growth at the low end of the 3 per cent to 5 per cent range.
At the same time, the picture is by no means all bleak. The big issue for Unilever is whether consumers, cash-conscious or otherwise, increasingly will favour cheaper versions of products. That underlying sales in developed markets grew by 2.8 per cent, and in North America by 4.8 per cent, during the first quarter backs up the assertion that the attractions of its brands still hold. It’s a safe assumption that some of its smaller competitors will be finding life tough.
Of course, it is likely that there will be some hard months ahead, but it is far from game over for Unilever, nor, indeed, for its shares, which offer good value. Up 33p, or 0.8 per cent, to £41.04, those shares trade for 14.7 times Liberum’s forecast earnings and carry a dividend yield of 4.3 per cent. Existing owners definitely should hold on.
ADVICE Hold
WHY Short-term pressure on trading, but sound prospects over the longer term and the shares are priced well
Boohoo
There can be few investors shedding tears over Boohoo’s share price, save perhaps for those who failed to buy in a few years ago. The online fast-fashion retailer and stock market darling has been touching new highs in recent days, buoyed by strong results for last year, upbeat comments on recent trading and bullish analysts’ notes.
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While it might disappoint those who had hoped that the pandemic would usher in a less disposable mentality among consumers, it seems clear that the popularity of this retailer among fashion-conscious teenagers and twenty-somethings is not going away. Shareholders, too, seem drawn to it, even though it doesn’t pay a dividend, preferring to retain its cash to invest into the business.
Boohoo was founded in 2006 and sells fashion at affordable prices. It operates brands including Pretty Little Thing, Coast and Karen Millen. Listed in March 2014 on Aim at 50p apiece, Boohoo shares touched a high of 338p on Tuesday, before losing a little bit of the exuberance yesterday to shed 8¾p, or 2.6 per cent, to 329¼p.
Investors are responding to several phenomena. First, there is the sheer rate of the retailer’s growth: in the year to February 29, revenues rose by 44 per cent to more than £1.2 billion and pre-tax profits were up 54 per cent at £92.2 million. It has more than 14 million customers.
Second, and perhaps more importantly, having stopped shopping in numbers in March when the lockdown across Britain was introduced, Boohoo’s customers are back. The company said at the tail end of last month that April’s sales had grown against the same month last year.
Boohoo’s lack of debt — it has net cash of £240.7 million — gives it a comfortable cushion against short-term trading disruptions. Its online model and ability to turn round new stock swiftly put it in a strong position relative to other competitors in fashion retailing.
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The shares, which have no dividend yield, trade for a high multiple of about 55.8 times Credit Suisse’s earnings forecasts for this year. Having consistently proven its ability to keep growing, it would take a confident investor to bet against it.
ADVICE Buy
WHY Highly popular, effective online model, proven growth
