Based on recent results, global consumer-goods giant Unilever (NYSE:UL) has gotten its store back in order.
Driven by innovation, pricing adjustments, and ad spending, fourth-quarter organic volume shot up by 5%. Developing and emerging markets -- where Unilever does roughly half its business -- easily surpassed companywide results.
For full-year 2009, the maker of everything from Slim-Fast shakes to Axe body sprays grew organic volume at a respectable 2.3%. That achievement went hand in hand with broad-based market-share gains, which, notably, accelerated throughout the year.
Why all the ink about volume? Two reasons. First, it's arguably the most direct measure of how consumers are responding to a company's products. Second, when CEO Paul Polman took over in early 2009, he made revitalizing Unilever's then-ailing volumes a strategic priority. That operations have turned around accordingly suggests that Polman is pulling all the right levers.
Yet judging by the stock's sell-off, the market was focused on other, less impressive metrics. As commodity costs were decreasing, Unilever was able to accommodate cash-strapped consumers by lowering prices, which in turn contributed to a nearly 5% deterioration in quarterly sales.
Yeah, negative sales growth draws unflattering headlines, but the more important factor is that operating profit rose 4% (excluding restructuring expenses). In other words, what management did not do is indiscriminately slash prices in a headlong lunge for volume growth.
Earnings per share were also down on the quarter and the year. Culprits here were many, including unfavorable currency movements, one-time profits in 2008, and higher pension costs. A better gauge of the core business, however, may be cash flow, where operating cash flow rose by 1.4 billion euros in the quarter -- better by more than 25%. Free cash flow added an extra 1.7 billion euros on the year, a 53% gain on 2008.
Unilever expects business to remain tough, challenged by low consumer confidence and peer competition. Also, 2010's year-over-year volume comparisons are likely to be less rosy, even as reported profit stands to improve. Another risk is the company's lineup of products itself, which, in my estimation, isn't as recession-resistant as that of a Church & Dwight (NYSE:CHD) or Colgate-Palmolive (NYSE:CL).
Consider, however, that Unilever can boost results simply by focusing on internal matters. Operating margin still lags that of major peers, and CEO Polman -- a former leader at Procter & Gamble (NYSE:PG) and Nestle -- is committed to driving executive performance while reducing costs and increasing cash flow. So far, he has executed brilliantly.
In addition, management has earmarked 1 billion to 2 billion euros per year for bolt-on acquisitions, which means that the recent purchase of Sara Lee's (NYSE:SLE) personal-care brands is likely just the beginning of mergers and acquisitions.
Finally, along with consumer-goods companies such as Philip Morris International (NYSE:PM), Unilever offers diversified currency exposure -- a portfolio essential as central governments around the world pursue vastly different monetary policies.
All told, picking up some Unilever shares could help investors get their own shops in fine order.
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