1 green flag for Unilever and 1 red flag

Inflation is in the headlines today as consumers face rising prices throughout their daily lives. One place where inflation is easily noticeable is the grocery store, where products from companies like Unilever (NYSE:UL) line the shelves. Consumer products manufacturers are dealing with their own inflationary headwinds and passing on the financial blow as fast as they can.

Here’s how Unilever is faring in that effort and why inflation remains a big problem for the company.

Green flag: big price increases

Unilever was able to increase its prices by 11.2% in the second quarter of 2022. This comes after price increases of 8.3% in the first quarter and 4.9% to end 2021. It is, without a doubt, in the process of to move forward quickly. increased costs for consumers. This is exactly what Unilever should be doing right now, and the action is having the desired effect. Notably, in the second quarter, organic sales increased by 8.8%.

Image source: Getty Images.

A possible consequence of this is that consumers often turn to lower priced products when faced with significant price increases. This has indeed been the case at Unilever. However, the volume of sales fell “only” by 2.1% in the second quarter and by 1% in the first quarter. The price increases in the fourth quarter of 2021 did not lead to a drop in volume at all.

So at this point, Unilever has been pretty good at pushing through price increases to offset the inflation it’s seeing without hurting its business too much. As long as Unilever can continue to achieve this kind of success, it should be able to get by inflationary hit that it and every other consumer staple company is experiencing today.

Red Flag: Margin Compression

There’s a problem: inflation is incredibly high right now. So the price increases that Unilever faces are significant. So material that he cannot transmit them all at the same time. This is why there have been several rounds of price increases. But if the company goes back to the well too often, the well could dry up. Note how Unilever’s volumes have declined over the past three quarters as price increases have increased. There is a cause and an effect that is essential to understand.

More consumer staples companies try to keep price increases to a minimum and often wait to pass on costs until they are clearly a permanent or significant factor. This means that Unilever is behind inflation. To put a figure on that, the company’s underlying operating margin fell 1.7 percentage points year-over-year in the second quarter. In the first six months of 2022, the underlying profit margin decreased by two percentage points.

Although material price increases in the second quarter offset lower margins, allowing earnings per share to rise 1%, profits in the first half of the year were still down 4.7%. The company is catching up with the inflation it sees in its business, but there is clearly still a gap it needs to fill to bring its margins and profitability back to previous levels.

A delicate dance

At first glance, a price increase seems like a pretty simple thing. But that’s really not the case. At present, Unilever is seeing mostly positive results from its efforts to pass on rising costs to consumers, but its margin performance shows it still needs to do more. The lag is normal, but rapid price increases driven by today’s high levels of inflation could easily make the already complicated process of raising prices even more difficult.

Shareholders should be happy with the company’s success so far, but they will need to keep a close eye on the operating margin.

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Reuben Gregg Brewer holds positions at Unilever. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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