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Nestle Cuts Its Outlook as Sales Stall

By Dan Caplinger - Jul 28, 2017 at 9:42AM

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The food giant isn't moving forward quickly enough with turnaround efforts to make shareholders happy.

Nestle (NSRGY 0.53%) leads the food industry, and its role atop the sector has left the company vulnerable to adverse business trends. In many of the countries Nestle serves, sluggish economic growth has put pressure on consumers, with Nestle seeing the impact in its own revenue figures. The food giant has made efforts to bolster its financial results, but its actions haven't generated as quick of a turnaround as most investors would have preferred.

Coming into Thursday's release of its first-half results, Nestle investors wanted to see evidence that the company could make meaningful progress in boosting revenue while staying profitable. Nestle wasn't able to make that happen, with sales actually declining from the year-ago period and only minimal gains in earnings. Let's take a closer look at Nestle's results and what they mean for the food company going forward.

KitKat promotional material from Nestle.

Image source: Nestle.

Nestle has a disappointing start to 2017

Nestle's first-half results didn't make the grade in most investors' eyes. Revenue fell 0.3% to 43 billion Swiss francs, marking a further slowdown from minimal gains in fiscal 2016. A healthy gain in GAAP net profit came mostly because of a one-time negative impact to the year-earlier period, and looking at Nestle's underlying adjusted earnings per share, the 1.68 Swiss francs per share that Nestle posted was up just 2% from the first half of 2016.

Looking more closely at Nestle's numbers, the downward effect of strategic moves was evident. Organic sales growth matched last quarter's numbers at 2.3%, with pricing increases contributing about two-fifths to that number and real internal growth making up the rest. Yet divestitures during the past year cost Nestle exactly the same 2.3 percentage points of revenue, and adverse currency fluctuations produced the slight decline on the top line.

Nestle did see some pockets of growth among its various segments. The Asia, Oceania, and sub-Saharan Africa segment had the best organic growth of Nestle's regions at 4.8%, with China and Southeast Asia being especially noteworthy contributors to gains. Yet higher restructuring-related costs hit operating profit margins in the region. The same dynamic was present in the Nestle Waters segment, which enjoyed 4% organic growth, and Nestle's other businesses category, which saw organic growth of 3.7%.

Yet many of Nestle's key areas didn't match that pace. The nutrition segment saw only 0.9% organic growth as mixed results in China, Brazil, and Mexico created some challenges for the company. The Europe, Middle East, and Africa segment suffered from weaker sales in Western Europe, which limited revenue gains to 1% organically. Nestle's Americas region dealt with flat organic results in North America and an overall growth rate of 1.3% on an organic basis. Weak consumer demand was evident in several areas, and weather impacts hit some key areas, like ice cream.

Can Nestle finally get moving forward?

CEO Mark Schneider tried to focus on the positives. "We are pleased with our value creation progress in the first half," Schneider said, which "includes solid operational improvements as well as portfolio management choices and our decision to increase balance sheet efficiency." However, the CEO noted that, "while volume growth remains at the high end of our industry, pricing continues to be soft," and that hit Nestle's results during the period.

Nestle also guided investors to expect weakness during the remainder of the year. It kept its guidance for organic growth in a range of 2% to 4%, but the company said it would likely hit the lower half of that range. Long-term goals for 2020 remained unchanged, but Nestle didn't add any color on exactly what the glide slope toward those goals would look like.

Nestle shareholders weren't entirely pleased with the news, and the stock fell 2% on the New York Stock Exchange on Thursday following the announcement. Nestle will have to move more aggressively to demonstrate its ability to make a full recovery from its current malaise, or else even long-term investors might start to lose faith in the company's ability to take full advantage of its leadership position in the food industry.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nestle. The Motley Fool has a disclosure policy.

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