Reckitt cuts sales target as China infant formula demand slows

LONDON (Reuters) - Reckitt Benckiser RB.L cut its full-year revenue target after reporting lower than expected sales in its last quarter under long-time chief executive Rakesh Kapoor, hurt by a surprise slowdown in demand for infant formula in China.

FILE PHOTO: Mead Johnson's product Enfamil baby formula are displayed on a store shelf in New York City, U.S., February 10, 2017. REUTERS/Brendan McDermid/File Photo

Shares of the British household goods maker, which had risen the previous day to near their highest level for the year, fell as much as 5.7% in early trade.

The Durex condom and Lysol disinfectant maker said on Tuesday it now expected full-year like-for-like sales growth of between 2% and 3%, down from its previous target of 3% to 4%, also blaming a tough market in Europe for its downgrade.

Reckitt, which kept its “broadly flat” operating margin target, said slowing birth rates over the past two years and increased competition had led to market share losses for its Enfamil infant nutrition products in China, its biggest market for baby food.

The company is also recovering from supply chain disruptions in China, after technical issues at a baby formula factory in the Netherlands, which supplies the Asian market, prevented it from supplying retailers with formula in the third quarter of 2018.

The disruption forced mothers to turn to rival products and in part helped rival Danone DANO.PA, which last week reported strong infant nutrition sales in China as its strategy to focus on more premium products paid off.

Kapoor, who in September will hand over to PepsiCo executive Laxman Narsimhan, also blamed conditions in Europe saying “customers are quite challenged.”

Brands affected by this included Scholl, which has been struggling for years, but he shot down rumors the company would sell or divest the brand.

For Reckitt, the combined problems resulted in a surprise 1% drop in second-quarter like-for like sales in its health business, even as sales of its over-the-counter products, such as Mucinex cough medicine, rebounded from a steep decline.

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Analysts were expecting Reckitt’s Health like-for-like sales to rise 1.3%.

“Within Health, Infant and child nutrition was a big negative surprise,” Bernstein analyst Andrew Wood said, adding he expected the business to grow in the third quarter as it faced an easier comparison with last year.


Overall, like-for-like sales were flat in the second quarter, missing the 1.9% growth analysts on average had expected, according to a company supplied consensus.

Net revenue rose 2% to 3.08 billion pounds ($3.7 billion) just shy of the 3.13 billion consensus estimate.

Kapoor said on a media call he was disappointed by the company’s performance in the first half but was “confident growth would be second-half weighted.”

Kapoor, who presided over 32 quarters as CEO in his 32 years with the company, was bullish that increased investments behind its brands and in medical channels, as well as new products such as Mucinex Night Shift and Enfagrow Pro Mental, and its expansion into new cities in China would help drive growth.

Still, analysts said the new CEO has a tough task.

“The patchy half-year figures mean the incoming CEO Laxman Narasimhan has a difficult job on his hands to try and put the business back on track, as well as decide the strategic future direction of the group,” investment firm AJ Bell said.

Reckitt shares were down 2.7% at 6,492 pence at 1230 GMT, among the biggest losers in the FTSE .FTSE index.

Reporting by Siddharth Cavale; Editing by David Holmes and Mark Potter