Dealing with changing consumer appetites is no easy task, and global food giant Nestle (NASDAQOTH:NSRGY) has more exposure than most companies to shifts in the way its customers think about its food products. Recently, Nestle has had to deal with tough economic conditions in many of its markets along with rising demand for high-quality food offerings, and that has held back some of its growth.
Coming into Thursday's release of its first-quarter sales figures, Nestle investors fully understood that the company would continue to face demand-driven headwinds, but they still wanted to see Nestle take action to bolster its future prospects. Despite modest sales gains, Nestle seems optimistic about potentially improving conditions in the food industry, and that could drive sales higher in the months and years to come. Let's look more closely at Nestle to see how it performed and what lies ahead for the food giant.
Nestle keeps things moving forward
Nestle's first-quarter sales results weren't particularly exciting, and they clearly showed the difficult conditions the food company faces. Sales climbed just 0.4% to 21 billion Swiss francs, with that pace of growth slowing even from last year's tepid growth rate of just under 1%. Yet that figure was actually slightly better than many investors had expected to see from Nestle.
A closer look at the report shows plenty of offsetting factors affecting Nestle's numbers. Organic growth was stronger at 2.3%, with 1.3 percentage points of the gain coming from what the company calls real internal growth and the remaining percentage point reflecting increases in pricing. However, Nestle divested more assets than it acquired during the past year, and that put 1.5 percentage points of downward pressure on sales. Foreign exchange impacts also cost Nestle on its top line.
Geographically, Nestle once again saw the same divergences in its core business. The Americas zone saw the best performance, with sales gains of 2.6% benefiting substantially from favorable foreign exchange exposure. Fundamentally, the Americas business saw real internal growth fall 1.4%, with pricing gains of 1.8% offsetting that decline to produce minimum organic growth. In the Asia, Oceania, and sub-Saharan Africa segment, sales growth of 1% came despite substantial foreign exchange headwinds, and organic growth of 4.5% led the company with the majority of the rise coming from real internal growth. In Europe, the Middle East, and Northern Africa, Nestle's results include organic growth of 1.7% but a nearly six percentage point drop due to divestitures, and poor foreign exchange comparisons contributed to a net drop of nearly 7% in sales for the region.
The other parts of Nestle's overall business had mixed performance. The water segment saw sales climb 1.1% due largely to organic growth, while the nutrition segment had a 0.2% rise in revenue. The other businesses category saw strong sales gains of nearly 8%, riding strength in skin health and health science.
What's next for Nestle?
CEO Mark Schneider blamed some of Nestle's issues on the calendar. "The leap-year comparison and other seasonal effects made the start of this year particularly challenging," Schneider said, but "we were encouraged by the growth in Asia and the resilience of consumer spending in Europe." Still, softness in the Americas was troubling for the food giant.
Yet Nestle also took pains to emphasize that it still sees itself as being on track for its long-term goals. The food giant confirmed that it expects 2017 organic growth of between 2% and 4%, and it is still seeking to squeeze more profits by spending money on restructuring efforts now. Because of those expenses, Nestle expects operating profit margin to be flat in 2017 compared to 2016 levels, but the efforts should produce growth in underlying earnings per share and should help make Nestle's capital structure more efficient.
Nestle shareholders didn't react strongly to the news, and the stock was up just a fraction of a percent in trading on the Swiss Exchange in Zurich following the announcement. In order to get investors excited about Nestle, the company will have to start seeing more dramatic growth, and that will be difficult until consumers make it clearer what they truly want in terms of product lines going forward.