Product Innovations Drive Unilever Forward

Unilever (NYSE: UL  ) received a lift in the stock market after reporting growing operating performance for the full fiscal year 2013. The company's share price increased by more than 3.8% in after-hours trading, to $41.35, because of its better-than-expected 2013 earnings results.

While most big and global consumer-goods companies, including Procter & Gamble (NYSE: PG  ) and Colgate-Palmolive (NYSE: CL  ) , experienced a growth slowdown in the emerging markets, Unilever managed to raise its 2013 emerging markets sales by 8.7%, with a 4.8% increase in volume. Innovation is one of the most important factors behind this decent growth.

Unilever's growing operating performance was driven by product innovations
Overall, Unilever's core earnings per share came in at €1.58 per share, much better than its EPS forecast of €1.53, while the underlying sales growth jumped by 4.1%, higher than the Wall Street's growth expectation of 3.9%. Whereas the underlying sales jumped by 4.6%, Unilever's 2013 total turnover dropped 3%, caused mainly by a 5.9% foreign currency depreciation.

At the constant exchange rate, Unilever has managed to increase its gross margin by 110 basis points (bps) to 41.2%, driven by product innovations, low-margin business divestment, and cost-saving initiatives. Because the advertising and promotion spending was 50 bps higher and overhead was up 20 bps, Unilever's core operating margin rose by 40 bps to 14.1%.

The two main growth drivers for Unilever in 2013 were home care and personal care, with underlying growth at 8% and 7.3%, respectively. Home care's improving business performance was driven by the increase in volume in fabric cleaners and fabric conditioners. Unilever's household-care business experienced double-digit growth in the fourth quarter, supported by the strong momentum of the dish-wash brands.

Furthermore, new product innovations, including Cif ultrafast sprays and Sunlight Power of 100 Lemons, also fueled the overall growth. In the personal-care business, the hair care, skin cleansing, and deodorants categories also enjoyed good growth with product innovations such as Dove Repair Expertise, Pepsodent Germicheck+ and Zhong Hua Porcelain White oral-care products, and Axe Apollo. 

In the long run, Unilever considered innovations to be the most important pillar for a sustainable competitive advantage. The company sets the goal that around 75% of all innovations will have higher Unilever average gross margin, to sustain competitive growth and up-trade its categories.

Procter & Gamble and Colgate-Palmolive also rely on innovation to drive growth
Procter & Gamble is also committed to continuous product innovation. In the third quarter, the personal-cleansing category experienced a 0.5-point increase in value share, driven by innovations in Olay, Old Spice, and Herbal Essence's body wash. Moreover, growth in Japan, Latin America, Eastern Europe, and Central Europe was led by product packaging and commercial innovations. Looking forward, the company will increase its budget in research and development spending to strengthen its near- and mid-term innovation pipeline.

In Colgate-Palmolive's business, innovation is also the key to increase share and category growth, especially with its leading toothbrush and toothpaste business. The recent launch of the Colgate Slim Soft Charcoal manual toothbrush has helped Colgate-Palmolive to drive market share in all markets. The company's Slim Soft variants reached double-digit market share in many countries, such as 20% in Hong Kong, 17.9% in Thailand, and 10.1% in Taiwan.

My Foolish take
Unilever really pleased its shareholders with the decent operating performance for the fourth quarter and for the full fiscal year 2013. With leading global positions, especially in emerging markets, and its ongoing product innovations, Unilever could continue to increase underlying sales and improve its core operating margin as well as profitability in the long run. At the current trading price, Unilever offer investors a quite sweet dividend yield at 3.7%, higher than the dividend yields of both Procter & Gamble at 3% and Colgate-Palmolive at 2.1%.

  


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