Demand for Reckitt's hygiene products slips from pandemic peak

Reckitt Benckiser (RKT) will have been disappointed when the scientific community decided that Covid-19 was an airborne disease. When the government was asking everyone to wash their hands whilst singing happy birthday, people were also stockpiling Reckitt’s cleaning products Dettol, Lysol and Cillit Bang. Now the health advice is to leave your window cracked rather than disinfect all your surfaces, Reckitt has struggled to maintain the like-for-like sales growth in its hygiene products.

In the first half of 2021, net revenue on a constant exchange rate basis was 1.5 per cent up on the 2020 half year. But in the three months to June 2021, it was down 1 per cent on a like-for-like basis. Part of the this drop in Q2 was because of the reduction in frequency of usage in hygiene products from the “peak levels” experienced in Q1. This alone wouldn’t be a huge issue, but the markets seemed to be spooked (down 9 per cent on the morning of results) by its slipping profit margin.

Its operating margin was down 290 basis points to 21.6 per cent due to a reduction in the sales of its higher margin health products and rising cost inflation. Demand for high margin cold and flu relief products, including Strepsils and Nurofen, declined as Covid-19 measures subdued the spread of illness. Meanwhile, cost inflation accelerated in the second quarter. It will take time for it to offset this cost headwind with higher prices and improved productivity and management has adjusted its profit margin guidance to between 22.7 and 23.2 per cent for the full year. This is 40 to 90 basis points lower than 2020.

It seems the market has overreacted to this disappointing profit margin news, though. Reckitt is currently trading at a lower value than at any point during 2019, despite its net revenue growth of 13.4 per cent against 2019. Demand for its hygiene products is also still well above its 2019 level with Lysol present in 22m more households now than two years ago. Even if demand drops back slightly from is pandemic peak, it's unlikely to fall that far.

Since 2020, it has also invested £1bn in “foundations of the business”, which means that its 2022 innovation pipeline has increased markedly. When the market does settle into something more meaningfully comparable with 2019, it will be in a good position to accelerate new product launches. Buy.

Last IC View: Buy, 6,004p, 24 February 2021