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Nestle Gets a Sweet Start to 2019

By Dan Caplinger - Apr 22, 2019 at 10:21AM

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The food giant kept building momentum in its recovery as a key partnership started paying off.

Consumers are more demanding than ever, and for food giant Nestle (NSRGY -2.28%), keeping up with what people want is a constant struggle. But after having gone through a period of tougher industry conditions, Nestle has recently been able to get itself moving in the right direction, and some key strategic partnerships have given the Switzerland-based global food company a big boost.

Coming into last Thursday's first-quarter financial report, Nestle investors were looking forward to seeing whether the company's sales growth would remain healthy. The latest report from Nestle confirmed that it continues to move forward, and the food giant sees a solid 2019.

Several bags and boxes of Starbucks coffee.

Nestle now offers packaged goods under the Starbucks brand. Image source: Nestle.

Nestle stays hungry for growth

Nestle's first-quarter sales figures looked strong. Total reported sales were up 4.3% to 22.2 billion Swiss francs ($21.9 billion), tripling the rate of growth that the company had in the year-ago period. Because Nestle provides only sales data in odd-numbered quarters, investors didn't get any sense from the report about how the Swiss company's earnings fared to start 2019.

Nestle's sources of growth were encouraging to long-term investors. Organic growth accounted for 3.4 percentage points of the 4.3% reported sales gain, with 2.2 percentage points of real internal growth complementing 1.2 percentage points of growth derived from price increases. Merger and acquisition activity added another 1.2 percentage points, but foreign currency impacts weighed down Nestle's growth rate slightly, costing it 0.3 percentage points of top-line gains.

Regionally, Nestle saw the biggest jump in its Americas segment, with reported 11.1% growth. Most of that gain came from last year's acquisition of a license to market branded products under the Starbucks (SBUX 0.91%) name, but organic growth of 3.4% came mostly from healthy pricing practices and a favorable movement in the U.S. dollar versus the Swiss franc. The Purina line of pet food was also a key contributor to growth in the U.S. market, while coffee added to gains across the hemisphere.

Elsewhere, results were mixed. The Europe/Middle East/North Africa segment struggled with a reported 0.7% drop in sales, with 2.8 percentage points of downward pressure from foreign exchange wiping out organic growth of 2.1%. Yet the region's real internal growth was strong, and a failure to maintain pricing discipline held back the company from larger gains. Purina was strong and the candy area was also favorable, but coffee struggled.

In the Asia/Oceania/sub-Saharan Africa segment, reported growth of 1.9% stemmed from organic growth of 3.3%, weighed down by foreign exchange pressures. Strength in China overcame sluggishness in Japan and across Oceania, and infant nutrition was a notable contributor to growth.

Nestle was able to pass through big price increases in its water segment that offset falling real internal growth. The big winner for Nestle was its other-business segment, where a 6.8% organic growth rate came largely from healthy performance in skin health products and medical nutrition.

Can Nestle keep growing?

CEO Mark Schneider was happy with how the year started. "Our increased speed, innovation for a changing world and execution focus are clearly paying off," Schneider said, and he pointed to Nestle's success in maintaining momentum from 2018.

In particular, Schneider sees a lot of promise from the Starbucks collaboration: "In the quarter, we announced the launch of a new range of 24 premium coffee products under the Starbucks brand. The Nestle and Starbucks teams did an outstanding job and developed these products in just six months."

Nestle confirmed that it sees 2019 playing out the way it did three months ago, with continued gains in organic sales growth and stronger figures for operating profit margin likely to help the company reach its 2020 targets.

Shareholders were reasonably pleased with the sales report, and the stock was higher by a fraction of a percent Thursday following the announcement. With a good start to its work with Starbucks, Nestle could generate even greater momentum throughout the rest of 2019 and beyond.

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Stocks Mentioned

Nestle S.A. Stock Quote
Nestle S.A.
NSRGY
$116.88 (-2.28%) $-2.73
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$71.93 (0.91%) $0.65

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