Unilever cost cuts to boost earnings, beauty brands are strong

Unilever, the Dove brand owner that is moving into make-up with its recently-announced Hourglass buy,  lifted its annual profitability target on Thursday after cost cuts led to a big improvement in the first half of the year. This showed that it can boost returns after rebuffing a $143 billion takeover bid.

Underlying sales rose 3 percent in both the second quarter and the first half, excluding currency fluctuations and acquisitions. That was slightly below analysts' average expectations for growth of 3.2 percent for the quarter and 3.1 percent for the half, according to a company-supplied consensus.

Its Dove, Sunsilk, and Dermalogica brands all continued to grow strongly during the half while the recently-acquired Dollar Shave Club and Living Proof look set to drive growth further.

Overall, growth for the group in the six months was due entirely to pricing, as volume was flat. But volume should accelerate in the back half of the year, Unilever said, helped by new products.

The company stood by its full-year forecast for growth in the 3 to 5 percent range. Underlying earnings per share rose 14.4 percent to 1.13 euros per share.

The cost savings at Unilever came as the packaged goods industry's biggest names, including Nestle and Procter & Gamble, are being targeted by shareholder activists pushing for better returns.

Unilever, whose own margins came under scrutiny in the wake of February's shock takeover bid from Kraft Heinz, said on Thursday that such investor pressure was becoming the norm.

"It's something that we keep on our radar screens here ourselves," Chief Financial Officer Graeme Pitkethly said. "We all have to deal with it and we're realistic about that.”

The Anglo-Dutch conglomerate stepped up its savings. It now expects its underlying operating margin to grow by at least 100 basis points this year, up from the target of at least 80 basis points given in April when it announced the results of a review sparked by the Kraft bid.

Its underlying operating margin improved 180 basis points to 17.8 percent in the last six months, helped by an acceleration of cost-savings programmes, and a 130 basis point drop in brand and marketing spending. Its goal is to reach 20 percent by 2020.

Analysts welcomed the margin improvement, but voiced concern that it was driven by reduced marketing, which can hit sales. But it said marketing spending would rise in the second half, as new product launches were skewed to that period, adding that full-year spend should match the previous year.

Unilever saved more than 1 billion euros in the first half of the year, bringing it closer to its target for 6 billion euros in three years.

Additional reporting by Sandra Halliday.