UN Unilever NV

By Saabira Chaudhuri 

LONDON-- Unilever PLC disappointed investors on Thursday, warning of a difficult start to the year while reporting lower sales for 2016, driven by volatile currencies combined with a slowdown in its refreshments and home-care arms.

The consumer-goods giant, whose brands include Hellmann's mayonnaise, Dove soap and Ben & Jerry's ice cream, reported a 5.5% rise in net profit from a year earlier to EUR5.5 billion ($5.91 billion) in 2016. Revenue fell 1% to EUR52.7 billion, hit by a negative currency impact, although it climbed 4.3% at constant exchange rates.

Unilever's shares were down 4.4% in Thursday morning trading in London.

Volumes in the final quarter of the year declined 0.4%, coming in negative for the second quarter in a row and missing analyst estimates. The company has turned to driving sales growth through price increases lately, a strategy generally seen as less healthy by investors than growing volumes since it depends on trading customers up to more expensive products rather than attracting new ones.

Liberum analyst Robert Waldschmidt offered a bearish view on the company, saying Unilever will have to move to shore up volumes by cutting prices in emerging markets despite higher raw material costs.

"The tough market conditions which made the end of the year particularly challenging are likely to continue in the first half of 2017," said Chief Executive Paul Polman.

The results contrast with a strong performance from rival Procter & Gamble Co., which last week offered a more upbeat outlook for sales growth this year. P&G, which makes Gillette razors and Pampers diapers, has for years been slashing costs and reworking how it develops, markets and sells consumer staples in an attempt to accelerate growth.

Unilever has taken its own hard line on costs, adopting so-called zero-based budgeting, where companies justify each year's expenses from scratch, and has made changes to its organization to help it quickly adapt to local insights while also benefiting from having global scale in areas such as procurement.

The Anglo-Dutch company said volumes had been weak as consumers and retailers adjusted to devaluation-led cost increases, blaming Brazil's economic crisis and the recent demonetization in India for hindering its performance.

Emerging markets--which make up the bulk of Unilever's sales--logged growth of 6.5%, a slowdown from 7.1% reported a year earlier.

The company turned in a lackluster performance in developed markets, where it reported flat underlying sales growth as volume growth in North America was offset by price deflation in Europe. Unilever flagged what it described as an "intense" promotional environment in North America, particularly in hair products, where its sales declined.

Bernstein analysts described the performance by Unilever's personal-care, refreshments and home-care arms as "quite disappointing" in the fourth quarter, noting that only foods--typically a slow-growing business for the consumer goods giant--beat expectations.

For 2016, the personal-care arm reported 4.2% underlying sales growth, roughly flat with the 4.1% reported for 2015. In home care, Unilever reported 4.9% growth, compared with 5.9% last year. In refreshments--made up of tea and ice cream--Unilever reported underlying growth of 3.5%, compared with 5.4% last year. The food arm was a relative bright spot, logging growth of 2.1%, up from 1.5% in 2015.

However, sales continued to decline in Unilever's spreads business, as modest growth in emerging markets was offset by a continued decline in the developed world, where people are eating less bread and butter has made a comeback.

The company has shifted gears in spreads, carving it off to sit in a new division called the baking, cooking and spreads unit in 2015, and recently rebranding its "I Can't Believe It's Not Butter" vegetable fat spread to "I Can't Believe It's So Good for Everything."

Despite margarine's declining appeal with consumers in developed markets, Unilever has insisted it won't sell its spreads business, saying it is highly cash generative and maintained no interested parties are willing to pay the price it would want for the unit.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

January 26, 2017 05:22 ET (10:22 GMT)

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