Dive Brief:
- Nestle's first-quarter sales growth beat expectations, having grown by 3.9% on an organic basis to overall sales of 20.93 billion Swiss francs ($21.64 billion). Analysts had predicted a 3.6% growth rate, though overall sales missed estimates of 21.11 billion francs.
- Results were boosted by a strong performance in Nestle's coffee sector, as revenue from powdered and liquid beverages, namely coffee, grew 6.3%, due in part to advertising and promotion efforts. This is in spite of new challenges from companies like JAB Holding Co., which has snapped up coffee competitors like Keurig Green Mountain.
- Emerging markets remain a source of promise for Nestle, with 5.6% sales growth as compared to 2.5% in developed markets. However, the company still contends with continued issues with Maggi noodles in India and poor sales of Yinlu peanut-milk beverages in China.
Dive Insight:
Executives are confident these results should be a boost to investors' confidence and a signal of better things to come as the year progresses. That may be true, but other numbers paint a different picture.
The slowing growth rate is the most obvious. At 3.9%, it was lower than Nestle's last reported growth rate at 4.2% for 2015, which was the lowest in six years. It may have beat analysts' expectations, but investors may want to hold off on celebrating.
Since the beginning of the year, Nestle's stock has dipped 4.5%, which falls behind stock performances of rivals Unilever and Danone. Company executives do believe a turnaround is imminent. But investors are also concerned that Nestle has been slow to respond as its competition grows, such as the formation of Kraft Heinz last year, The Wall Street Journal reported.
Another concern for Nestle is sustained profit margins. The company has been helped by low commodity prices, which have dropped 30% over the past two years, according to Nestle. But those prices may now be bottoming out, and it's not clear whether they'll remain at those levels or begin rising once again.
This could make it easier for Nestle to raise consumer prices, which has been a struggle for the company, CFO Francois-Xavier Roger said on a call with analysts. But depending how that pricing strategy plays out with consumers, higher commodity costs could eat into future profit margins.