Reckitt reported third-quarter net revenue of £3.5bn, down 0.5% on a like-for-like (LFL) basis. Within that, volumes dropped 1.4%, better than the 3.1% drop that was expected, with pricing giving a 0.9% positive offset.
Hygiene and Health delivered both volume and price growth led by Lysol, Gaviscon, Durex and VMS. The Nutrition business saw LFL sales down 17.4%, as supply to customers was impacted by the Mount Vernon tornado – though this wasn’t as bad as expected.
Full-year targets are unchanged, pointing to LFL net revenue growth of 1-3%.
The shares rose 3.5% in early trading.
Our view
Reckitt is the maker of household and hygiene staples like Air Wick, Harpic, and Vanish. Third quarter results were better than expected but flattered somewhat by the impact of a tornado in Mount Vernon not being as bad as first thought. Despite the one-off nature of the beat, management still gave an upbeat tone on underlying performance.
Aside from the numbers, there’s a strategy shift underway. Several ‘non-core’ home care brands are on the chopping block. This isn’t a small reshuffle either, together they account for around 13% of annual sales. Streamlining makes sense, but there will be execution risk.
As the biggest contributor to sales, it's good to see volumes in Hygiene trending back in the right direction. Investors have been looking for a better balance between volume and price led growth and it looks like we might have reached the inflection point where things start improving. Competition in this segment is tough, and we’d like to see improved performance vs peers over the second half.
Nutrition's the smallest division but has continued to be a volume drag. Last year's sales were inflated by competitors' supply issues, and as they come back to market, Reckitt's giving back some of the market share it gained. Then the tornado’s caused more recent issues, but this unit is expected to be back on track in 6-9 months.
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 £2.0bn of expected free cash this year the fresh £1bn buyback and 4.4% yield is well supported. Of course, no returns are guaranteed.
Perhaps the biggest risk lies with its US subsidiary, Mead Johnson. 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 drive near term sentiment. This business has been classified as ‘non-core’ as part of the new strategy, and a range of options are being discussed.
With a new strategy and a valuation that doesn't look overly demanding, Reckitt looks attractive from here. But court rulings in the US will be key and meaningful volume recovery isn't expected until later in the year, which means investors should be prepared to wait for the tide to turn.
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 Refinitiv, 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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