Reckitt reported full-year underlying net revenue of £14.2bn. Like-for-like sales (LFL) growth was 1.4%, below market expectations. Growth was driven by higher prices, offset by a 0.6% drop in volumes. Hygiene and Health contributed to growth while Nutrition’s revenue declined 7.3% due to the effects of the Mount Vernon tornado on short-term supply chains to customers.
Underlying operating profit increased 3.0% to £3.5bn (3.3bn expected).
Free cash flow fell from £2.3bn to £2.2bn. The net debt position increased to £7.9bn, compared to £7.3bn the prior year.
Reckitt’s targeting LFL net revenue growth of 2-4% in 2025. Those expectations include low-single-digit LFL net revenue growth in Essential Home and Mead Johnson Nutrition, weighted toward the second half of 2025.
The board has recommended a final dividend of 121.7p.
The shares fell 2.3% in early trading.
Our view
Reckitt delivered a mixed year, and despite what looks like a softer outlook, managements upbeat comments on the results call were enough to reverse an early dip. It’s not the first name to call out a challenging start to the year, and the 3-4% growth expected from the core portfolio looks conservative.
There’s a fairly significant restructure underway, something that’s becoming a trend in the consumer goods space these days. Several ‘non-core’ home care brands are on the chopping block as well as the US based Nutrition business, Mead Johnson – in total they currently amount to around 30% of total sales.
That’ll leave behind a concentrated collection of the group’s best brands, 11 of which will make up around 80% of the streamlined Reckitt’s total sales. These includes global names like Vanish, Durex and Dettol and have a relatively even split across Europe, the US and Emerging Markets.
We like the idea, the bigger is better approach of the past is gone and focusing on areas Reckitt has market leadership should help drive better sales growth going forward. This collection of core brands has a history of outperformance and should be able to attract higher margins.
Shipping off Mead Johnson could also help alleviate some valuation pressure. There are hundreds of ongoing court cases in the US relating to its infant baby formula. After some setbacks, recent news appears to be more positive, but this will continue to weigh on sentiment and presents an ongoing risk.
Portfolio changes, along with cost cuts, have helped gross margins return to historic levels. While we’re happy to see progress, there’s a slight worry that a focus on costs and gross margins is a temporary fix. To sustain longer term growth, we’d like to see more of a focus on finding new distribution and increasing market share.
The balance sheet's in reasonable health, and with a history of delivering healthy free cash flow, the 4.1% forward dividend yield looks well covered.
Reckitt’s enjoyed a decent run since embarking on the new strategy, but we still think the valuation looks relatively attractive. Investors will need patience though; major portfolio changes carry execution risk and US court rulings will drive sentiment in the near term.
Environmental, social, and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Reckitt’s overall management of material ESG issues is strong.
Reckitt’s corporate responsibility committee oversees its ESG strategy, with progress reported in the annual Sustainability Insights Report, focusing on 19 areas like ethical business, product safety, and waste management. The company has strong anti-bribery policies and initiatives, including regular employee training and external audits, to ensure product safety. However, gaps in reporting persist, particularly around external quality management certification for Reckitt’s sites and suppliers.
Reckitt key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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