Reckitt Benckiser undershoots sales and profit expectations

Reckitt Benckiser (RKT) undershot market expectations for sales and profit growth in its fourth quarter as shoppers voted with their feet on price rises, while a compliance issue in the Middle East added to the pain. The consumer goods giant's shares were marked down by 12 per cent on the back of difficult annual results for new chief executive Kris Licht, who called the performance “unsatisfactory”. 

Like-for-like (LFL) net revenue fell 1.2 per cent in the final quarter of the year, compared with the 1.6 per cent uplift expected by analysts, as nutrition and health sales contracted. The company pinned the 2 per cent decline in health revenue on the timing of the cold and flu season. Overall LFL net revenue was up 3.5 per cent for the year. 

Reckitt's pricing power showed signs of weakness as overall volumes fell by 4.3 per cent on an annual and quarterly basis. All three divisions went backwards on units sold, with nutrition volumes sliding by a painful 10 per cent in the year as it struggled against a comparative period when it benefited from supply shortages at infant formula competitor Abbott Laboratories (US:ABT). 

Meanwhile, an unexpected accounting headache in the Middle East led analysts at RBC Capital Markets to dub the results "really grim rather than just poor”. Annual net revenue was reduced by £55mn because of “an understatement of trade spend in two Middle Eastern markets related to the fourth quarter and prior quarters of 2023”. Employees have been disciplined over the matter. Investors will be very much hoping that it is an isolated incident. 

The lower statutory profit posting was impacted by elevated impairment and finance costs as higher rates had an impact, while other operating expenses rose by 10 per cent. An adjusted operating profit of £3.37bn and a margin of 23.1 per cent were lower than expected by the market. 

Some good news was delivered by the free cash flow posting, up 11 per cent to £2.26bn. The 130 basis point increase in brand equity investment as a share of net revenue was another positive highlight.

The shares trade on 15 times forward consensus earnings, a discount to the five-year average of 19 times. But this doesn’t look overly appealing in a context where management has a lot of convincing to do. The company guided for LFL net revenue growth of 2-4 per cent this year. Hold.

Last IC view: Hold, 5,574p, 25 Oct 2023