Reckitt Benckiser – Rising Costs Hits Profits

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Reckitt Benckiser – Rising Costs Hits Profits
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First half like-for-like (LFL) revenue came in at £6.3bn, excluding the for sale Chinese Infant Nutrition business, a 3.7% annual increase. Changes in pricing and sales mix were behind revenue growth, though volumes also rose slightly. Operating profits declined 5% to £1.4bn, reflecting increased investment and cost inflation.

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Q2 2021 hedge fund letters, conferences and more

The group plans price rises in the second half to cope with the rising costs but expects full year margins to decline between 0.4 and 0.9 percentage points.

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The board recommended an interim dividend of 73p.

The shares were down 9.5% following the announcement

Reckitt Benckiser Is Planning To Cope With Cost Inflation

"Costs were on the rise at Reckitt Benckiser Group Plc (LON:RKT), causing a 5% slide in profits at the half.  Moving forward Reckitt is planning to cope with cost inflation with price hikes and productivity improvements, but it won’t be enough to offset the damage that’s been done. The group now expects margins to come in 0.4-0.9 percentage points lower at the full year.

While costs rose, revenue only grew modestly. Reckitt was up against tough comparisons across several product categories like Dettol and Vitamins, Minerals & Supplements as it lapped quarters of extremely strong pandemic-fuelled demand. It didn’t help that a weak cold and flu season meant demand for its more profitable OTC products was lagging.

All told, Reckitt’s half-year results were disappointing, sending shares on a nose dive. But a look beyond the headline numbers suggests this could be somewhat of an overreaction.

Compared to 2019 levels, Reckitt’s doing relatively well. A drop-off from the Covid-related frenzy that ensued last year was inevitable, but some of that demand has been sticky. Lysol, for example has seen its sales rise over 100% from pre-pandemic levels. Plus, cold-and-flu products are starting to see things pick up, particularly in US states where masks are no longer required. This trend could start to snowball across other markets as Covid restrictions ease heading into the winter.

The group’s also about to offload its troubled Chinese Infant Nutrition business, a welcome development in our eyes. This will leave it leaner and better able to capitalise on its more profitable brands.

This may be a case of the market failing to see the forest through the trees. Reckitt’s in the midst of a transition and at the same time it’s coping with a come-down from pandemic highs. But if the group can hold on to most of the customers it snapped up last year while still growing the arms of the business that struggled during Covid, we think it could be in a strong position to deliver long-term growth."

Article by Laura Hoy, Equity Analyst at Hargreaves Lansdown


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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)www.valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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