Volumes still falling at Reckitt Benckiser

Reckitt Benckiser’s (RKT) half-year results are a mixed bag. On the one hand, the consumer goods giant beat revenue expectations. Like-for-like sales increased by 4.1 per cent in the second quarter to £3.53bn, driven by strong performances from its health and hygiene divisions. Analysts had only expected growth of 3.7 per cent. 

However, the group’s success relied heavily on price hikes, as opposed to higher sales volumes. Indeed, between January and June volumes declined by 4.4 per cent, while price and product mix improvements resulted in growth of 10.4 per cent. The hygiene division – which includes brands such as Harpic and Cillit Bang – saw volumes decline most steeply, despite “improving trends across all regions”.

There were key differences between regions more generally. Volumes were weak in developing markets and like-for-like sales grew by just 2.2 per cent due to challenges in southern Asia. In contrast, sales in Europe proved more resilient and like-for-like revenue increased by 9.7 per cent.

From a profit perspective, Reckitt Benckiser put in a robust performance. Adjusted operating profit dipped by 2.4 per cent to £1.77bn on a constant currency basis, as the group faced higher fixed costs and higher variable employee compensation. However, its gross margin expanded due to greater productivity and higher prices. 

Across the full year, management expects operating margins to improve as well, “to be slightly above 2022 levels”. This prediction excludes the impact of last year’s bumper nutrition performance, resulting from a shortage of baby formula in the US. Management is also targeting organic sales growth of 3-5 per cent.

The big question for investors is when Reckitt Benckiser will return to volume growth and – in the meantime – whether customers will continue to accept price rises, or trade down to cheaper, unbranded products. 

The fact that the shares dipped by 4 per cent following the results suggests that investors are wary. However, this does mean the group is slightly cheaper than it was in the past: it is trading on a forward price/earnings multiple of 17 compared with a five-year average of 19. This isn’t enough to tempt us to an upgrade, however. Hold. 

IC View: Hold, 5,754p, 1 Mar 2023