Gross Margin Is Compounding, Currency Is Eating It, and 2026 Is Guided to the Floor
Key Takeaways
- The quarter was the best of the year and beat: fourth-quarter underlying sales growth of 4.2% (2.1% volume, 2.0% price) came in ahead of the 3.9% company-compiled consensus, with emerging markets accelerating to 5.8% and Power Brands, now 78% of turnover, running at 5.8% with 3.5% volume.
- The operating engine is real and is compounding. Gross margin rose 20bps to 46.9%, a third consecutive year of expansion, overheads improved 50bps on a productivity programme running ahead of plan, and underlying operating margin expanded 60bps to 20.0% even while brand and marketing investment hit 16.1% of turnover, the highest in over a decade.
- None of it reached shareholders in euros. Currency cost 5.9% of turnover and 8.8% of underlying EPS, so a 9.5% constant-currency EPS gain became a 0.7% reported one, turnover fell 3.8% to €50.5bn and underlying operating profit fell 1.1% to €10.1bn. With 59% of turnover in emerging markets, this is a structural feature of the asset, not a one-year accident.
- The 2026 guide is the tell. Management set underlying sales growth at the bottom end of its own 4% to 6% range with volume of at least 2% and only a "modest" margin improvement, which is essentially a commitment to hold the Q4 exit rate for four quarters. That exit rate leaned on emerging-market comparatives management explicitly flagged as non-repeating, while developed markets exited the year at 1.7% growth with 0.5% volume.
- Rating: Initiating at Hold. The transformation is working operationally, but the shares enter within 1% of a 52-week high on roughly 20x trailing underlying EPS while the reported P&L still shrinks, and management has guided to the floor rather than the middle of its own range.
Results vs. Consensus
Unilever reports a full set of financials twice a year and a growth-only trading statement in the first and third quarters, so the February release carries both a fourth-quarter growth print and the audited-basis full-year statements. Two things need stating before any number is read. First, everything below is on a continuing-operations basis that excludes Ice Cream, demerged on 6 December 2025 as The Magnum Ice Cream Company; the 2024 comparatives have been re-presented on the same basis. Second, the December 2025 share consolidation (eight new shares for every nine held) has been applied retrospectively to every per-share figure in both years, so the EPS comparison is like-for-like.
| Metric | Actual | Consensus | Beat/Miss | Magnitude |
|---|---|---|---|---|
| Q4 underlying sales growth | 4.2% | 3.9% | Beat | +30bps |
| Q4 underlying volume growth | 2.1% | 1.9% | Beat | +20bps |
| Q4 underlying price growth | 2.0% | 2.0% | In line | 0bps |
| Q4 turnover | €12,586m | n/a | n/a | (2.7)% YoY |
| FY underlying EPS | €3.08 | €3.05 | Beat | +1.0% |
| FY underlying operating margin | 20.0% | n/a | n/a | +60bps YoY |
| FY turnover | €50,503m | n/a | n/a | (3.8)% YoY |
| FY free cash flow | €5,921m | n/a | n/a | (6.1)% YoY |
Full-year income statement, year over year
| € million (continuing operations) | FY 2025 | FY 2024 | Change |
|---|---|---|---|
| Turnover | 50,503 | 52,479 | (3.8)% |
| Gross margin | 46.9% | 46.7% | +20bps |
| Brand & marketing investment (% of turnover) | 16.1% | 16.0% | +10bps |
| Underlying operating profit | 10,084 | 10,198 | (1.1)% |
| Underlying operating margin | 20.0% | 19.4% | +60bps |
| Non-underlying items within operating profit | (1,047) | (1,369) | (23.5)% |
| Operating profit | 9,037 | 8,829 | +2.4% |
| Operating margin | 17.9% | 16.8% | +110bps |
| Net finance costs | (503) | (520) | (3.3)% |
| Profit before taxation | 8,693 | 8,371 | +3.9% |
| Taxation | (2,481) | (2,332) | +6.4% |
| Net profit from continuing operations | 6,213 | 6,039 | +2.9% |
| Diluted EPS, continuing operations | €2.59 | €2.44 | +6.2% |
| Underlying EPS | €3.08 | €3.06 | +0.7% |
| Free cash flow | 5,921 | 6,304 | (6.1)% |
The growth bridge: fourth quarter versus full year
| Component of turnover change | Q4 2025 | FY 2025 |
|---|---|---|
| Underlying sales growth | 4.2% | 3.5% |
| of which volume | 2.1% | 1.5% |
| of which price | 2.0% | 2.0% |
| Effect of acquisitions | +1.3% | +0.6% |
| Effect of disposals | (0.4)% | (1.8)% |
| Effect of currency-related items | (7.5)% | (5.9)% |
| Reported turnover change | (2.7)% | (3.8)% |
| Turnover (€m) | 12,586 | 50,503 |
Quality of Beat/Miss
- Revenue: High quality on the metric that matters, low quality on the one that pays. The beat came from volume, which is what a staples business should want: fourth-quarter volume of 2.1% was the strongest of the year and represents the exit rate management is now guiding against. The mix of the beat is also clean, with growth broad across three of four business groups and Power Brands, at 78% of turnover, outrunning the group. What it did not do is convert into revenue: a 7.5-point currency hit in the quarter turned 4.2% underlying growth into a 2.7% reported decline, and for the year 3.5% underlying growth became a 3.8% decline. Excluding currency, turnover grew 2.3%, with underlying growth of 3.5% partly given back by portfolio pruning.
- Margins: Structural rather than cosmetic, and unusually well-composed. The 60bps of underlying margin expansion decomposes into 20bps of gross margin, 50bps of overhead reduction, and a 10bps increase in brand and marketing spend. A staples company that expands margin while raising advertising is not harvesting; it is compounding. The gross margin is also now a different number than it was: with Ice Cream out, 46.9% is a structurally higher base, and it is the third consecutive year of expansion. The one soft spot is that this is a mix of self-help and portfolio surgery rather than pricing power; price contributed only 2.0% for the year.
- EPS: The lowest-quality line in the print. Underlying EPS of €3.08 rose 0.7%, and the walk is instructive: sales growth and margin expansion together contributed 6.5 points, tax 1.3 points, and buybacks 1.5 points, all of which was very nearly wiped out by an 8.8-point currency hit. Underlying profit attributable to shareholders actually fell, from €6,816m to €6,761m; EPS rose only because the diluted share count fell 1.5% to 2,195.3m. Statutory diluted EPS from continuing operations of €2.59 grew a healthier 6.2%, but that is flattered by lower restructuring and a smaller disposal loss, not by operations.
Segment Performance
Unilever manages four business groups and reports underlying operating profit as its segment measure. Full-year segment margins are disclosed; quarterly segment margins are not, which is a real limitation when assessing whether the fourth-quarter growth acceleration was bought or earned.
Business groups, full year
| Business group | Turnover (€m) | % of group | USG | Volume | Price | UOP (€m) | UOM | Δ UOM |
|---|---|---|---|---|---|---|---|---|
| Beauty & Wellbeing | 12,848 | 25% | 4.3% | 2.2% | 2.1% | 2,471 | 19.2% | (20)bps |
| Personal Care | 13,161 | 26% | 4.7% | 1.1% | 3.6% | 2,973 | 22.6% | +50bps |
| Home Care | 11,565 | 23% | 2.6% | 2.2% | 0.4% | 1,718 | 14.9% | +40bps |
| Foods | 12,929 | 26% | 2.5% | 0.8% | 1.7% | 2,922 | 22.6% | +130bps |
| Unilever | 50,503 | 100% | 3.5% | 1.5% | 2.0% | 10,084 | 20.0% | +60bps |
Business groups, fourth quarter
| Business group | Q4 turnover (€m) | Q4 2024 (€m) | Reported change | USG | Volume | Price |
|---|---|---|---|---|---|---|
| Beauty & Wellbeing | 3,189 | 3,310 | (3.7)% | 4.7% | 2.8% | 1.8% |
| Personal Care | 3,307 | 3,235 | +2.2% | 5.1% | 0.6% | 4.5% |
| Home Care | 2,830 | 2,960 | (4.4)% | 4.7% | 4.0% | 0.6% |
| Foods | 3,260 | 3,434 | (5.1)% | 2.3% | 1.3% | 1.0% |
| Unilever | 12,586 | 12,939 | (2.7)% | 4.2% | 2.1% | 2.0% |
Beauty & Wellbeing
The showcase segment for the strategy and the one segment whose margin went backwards. Full-year underlying growth of 4.3% was evenly split between volume and price, accelerating to 4.7% in the fourth quarter with volume of 2.8%. Wellbeing delivered double-digit growth for the year, with Liquid I.V. crossing $1 billion and reaching record US household penetration above 18%, Nutrafol up 23%, and Olly up 9% and now a brand of over $500 million. Vaseline delivered double-digit growth for a third consecutive year and is now the group's eighth largest brand. The offsets were structural rather than cyclical: Hair Care grew low-single digit for the year as portfolio simplification and softer emerging-market conditions weighed on Sunsilk and Clear, and Prestige Beauty grew only low single digit, with Hourglass and K18 double digit but Dermalogica and Paula's Choice declining before returning to growth in the second half.
"Wellbeing continued to outperform its market, despite growth moderating as category conditions softened."
— 2025 Full Year Results announcement
The margin decline of 20bps to 19.2% is the honest cost of the strategy. Underlying operating profit fell 3.2% to €2,471m as a significant improvement in overheads was more than absorbed by a step-up in brand investment behind Power Brands and premium innovation, plus a slight gross margin decline. The fourth quarter also introduced the first crack in the Wellbeing story: volume growth slowed to about 5% from double digit in the first three quarters, which management attributed to two specific, fixable issues (a reduced share of assortment for Liquid I.V. at a key club-channel retailer, and rising customer acquisition costs in Nutrafol's direct-to-consumer business) plus a genuine market slowdown.
Assessment: This is the segment the equity story rests on, and it is doing what it should: growing above group, taking the incremental advertising, and accepting near-term margin dilution to build brand equity. The watch item is that Wellbeing's deceleration is being explained by two customer-specific issues while the market itself is also slowing; if the fourth quarter turns into two quarters, the "structural growth vertical" framing gets harder to hold.
Personal Care
The largest business group by turnover and, in the fourth quarter, the fastest growing at 5.1%. The composition is the issue. Full-year growth of 4.7% came 3.6 points from price and only 1.1 points from volume, and the fourth quarter was more extreme still: 4.5% price against 0.6% volume. Management attributes the pricing to commodity pass-through rather than premiumisation, which is a materially different quality of growth than the group average. Dove grew high single digit and Whole Body Deodorants continued scaling across 15 markets. The volume weakness sits in Latin America, where the group conceded it had mismanaged deodorant format mix.
"Personal Care underlying sales grew 4.7%, with 1.1% from volume and 3.6% from price. This competitive growth was led by commodity-driven price increases, while volume was supported by premium innovation, particularly in Dove, which grew high-single digit."
— 2025 Full Year Results announcement
Margin performance was strong, up 50bps to 22.6% on gross margin and overhead gains, partly offset by a step-up in brand investment concentrated in the US and premium segments. Reported turnover rose 2.2% in the quarter, the only business group to grow in euros, helped by 4.7 points of acquisition contribution from Dr. Squatch and Wild.
Assessment: The margin and the top line are both good; the mix is not. A 4.5% price / 0.6% volume quarter in the group's biggest segment is the opposite of the "volume growth, positive mix" mantra management repeats. With pricing guided to about 2% in 2026 and inflation concentrated in exactly this segment's inputs (palm, surfactants), Personal Care has to find volume to hold its growth rate.
Home Care
The clearest sequential recovery in the portfolio and the sharpest margin-versus-growth trade-off. Full-year growth of 2.6% was almost entirely volume at 2.2%, with price contributing just 0.4% because Unilever deliberately cut prices in Brazil to restore competitiveness. The fourth quarter accelerated to 4.7% with 4.0% volume, driven by Brazil returning to growth as the pricing correction took effect and by India reaching its highest ever market share. Wonder Wash, launched in 2024, is now in more than 30 markets, and Fabric Enhancers grew high single digit led by volume behind Comfort.
"Underlying sales growth accelerated to 4.7% in the fourth quarter with 4.0% volume supported by a sequential improvement in key emerging markets."
— 2025 Full Year Results announcement
Underlying operating profit fell 3.8% to €1,718m, but margin still rose 40bps to 14.9% as commodity and currency headwinds to gross margin were more than offset by overhead savings and a deliberately concentrated brand investment behind fewer innovations. Reported turnover fell 6.4% for the year, the worst of the four segments, on 7.1 points of currency.
Assessment: The most encouraging segment in the print. Management took a visible price cut, absorbed it in the P&L, and got volume back within two quarters. That is a competent commercial response and it is the single best evidence in the release that the new operating model can react. At 14.9% this remains the group's lowest-margin business, so its growth is dilutive to mix even when it works.
Foods
A record margin year and the weakest growth. Underlying growth of 2.5% (0.8% volume, 1.7% price) decelerated to 2.3% in the fourth quarter, with developed-market growth flat for the year against declining markets. Hellmann's continued to carry the segment, growing mid single digit on volume with its flavoured mayonnaise range now scaled across more than 30 markets and established as a €100 million platform. Unilever Food Solutions was flat, with positive North American volume offset by declines in China on weaker out-of-home consumption.
"Foods delivered a record year with underlying operating margin increased by 130 basis points to 22.6%, the highest level achieved by the business group."
— Srinivas Phatak, Chief Financial Officer
The 130bps of margin expansion, the largest of any segment, came from portfolio rationalisation, disciplined pricing, gross margin productivity and overhead control. It also comes with an explicit signal that the harvesting phase is over.
Assessment: Foods is now the group's joint-highest-margin business at 22.6%, tied with Personal Care, having got there partly by deleting revenue. Management has now said the priority shifts from margin to volume-led growth, which is the right call strategically and a mild negative for 2026 group margin arithmetic. Watch whether 22.6% proves to be a ceiling.
Geographic performance
Geographical areas, full year
| Geographical area | Turnover (€m) | % of group | USG | Volume | Price |
|---|---|---|---|---|---|
| Asia Pacific Africa | 22,427 | 44% | 4.6% | 3.0% | 1.6% |
| The Americas | 18,622 | 37% | 3.3% | 0.0% | 3.2% |
| Europe | 9,454 | 19% | 1.5% | 1.2% | 0.3% |
| Unilever | 50,503 | 100% | 3.5% | 1.5% | 2.0% |
Geographical areas, fourth quarter
| Geographical area | Q4 turnover (€m) | Q4 2024 (€m) | Reported change | USG | Volume | Price |
|---|---|---|---|---|---|---|
| Asia Pacific Africa | 5,497 | 5,691 | (3.4)% | 6.9% | 5.7% | 1.2% |
| The Americas | 4,707 | 4,831 | (2.6)% | 3.0% | (0.8)% | 3.8% |
| Europe | 2,382 | 2,417 | (1.5)% | 0.1% | (0.2)% | 0.3% |
| Unilever | 12,586 | 12,939 | (2.7)% | 4.2% | 2.1% | 2.0% |
Developed versus emerging markets, full year
| Market grouping | Turnover | % of group | USG | Volume | Price |
|---|---|---|---|---|---|
| Emerging markets | €30.0bn | 59% | 3.5% | 0.8% | 2.7% |
| Developed markets | €20.5bn | 41% | 3.6% | 2.6% | 0.9% |
| North America | €11.2bn | n/a | 5.3% | 3.8% | 1.4% |
| Latin America | €7.4bn | n/a | 0.5% | (5.1)% | 5.9% |
Developed versus emerging markets, fourth quarter
| Market grouping | Q4 turnover | USG | Volume | Price |
|---|---|---|---|---|
| Emerging markets | €7.4bn | 5.8% | 3.2% | 2.5% |
| Developed markets | €5.2bn | 1.7% | 0.5% | 1.1% |
| North America | €2.8bn | 2.8% | 1.3% | 1.5% |
| Latin America | €1.9bn | 3.2% | (3.6)% | 7.1% |
Assessment: These four tables contain the whole 2026 debate. The two market groupings swapped places in the fourth quarter: emerging markets went from 3.5% for the year to 5.8% in the quarter with volume of 3.2%, while developed markets went from 3.6% for the year to 1.7% in the quarter with volume of just 0.5%. Since developed markets are 41% of turnover and were the reliable volume engine through 2025, a 2026 built on the Q4 exit rate is a 2026 built on emerging markets carrying the group. Asia Pacific Africa at 6.9% underlying growth with 5.7% volume in the quarter is a genuinely strong number; it is also the number most exposed to the comparative effects discussed below.
Key KPIs
| KPI | FY 2025 | FY 2024 | Change | Read |
|---|---|---|---|---|
| Gross margin | 46.9% | 46.7% | +20bps | Third consecutive year of expansion |
| Brand & marketing investment | 16.1% | 16.0% | +10bps | Highest in over a decade, up 300bps in four years |
| Underlying operating margin | 20.0% | 19.4% | +60bps | Overheads did the heavy lifting at 50bps |
| Underlying effective tax rate | 25.7% | 25.9% | (20)bps | Contributed 1.3pts to underlying EPS |
| Underlying ROIC | 19.0% | 19.1% | (10)bps | Benefited ~100bps from the demerger; held by currency drag on profit |
| Free cash flow | €5,921m | €6,304m | (6.1)% | Decline is demerger tax on disposals; €6,249m excluding it |
| Cash conversion | 100% | 104% | (4)pts | Still at the company's stated commitment level |
| Net debt | €23,076m | €24,519m | (5.9)% | Helped by a €3bn pre-demerger payment from Magnum |
| Net debt / underlying EBITDA | 2.0x | n/a | n/a | 2024 net debt not re-presented, so no clean comparison |
| Power Brands, % of turnover | 78% | n/a | n/a | Was around 75% eighteen months ago |
| Power Brands USG | 4.3% | n/a | n/a | Q4 accelerated to 5.8% with 3.5% volume |
| Non-Power Brands volume | (1)% | n/a | n/a | Deteriorated to (3)% in Q4 |
| Restructuring costs | €599m | €710m | (15.6)% | 1.2% of turnover |
| Cumulative productivity savings | €670m | n/a | n/a | Ahead of the €650m expectation; €800m programme |
| Diluted average shares | 2,195.3m | 2,228.5m | (1.5)% | Contributed 1.5pts to underlying EPS |
| Quarterly dividend per share | €0.4664 | n/a | +3.0% vs Q3 2025 | US$0.5547 per ADR |
Key Topics & Management Commentary
Overall Management Tone: Confident on operations, careful on the outlook, and noticeably more specific about what has gone wrong than a Unilever call has historically been. Management volunteered the failures (Brazil pricing, deodorant format mix, the non-Power-Brand drag, the Wellbeing slowdown) with numbers attached rather than waiting to be asked, which is a change in disclosure posture and a credible one. Where the call was least convincing was on the arithmetic connecting a 3.5% year to a 4%-plus year, where the answer stayed at the level of confidence in emerging markets rather than a bridge.
The Currency Wedge Between Performance and Payoff
The defining fact of the year is that Unilever's operating performance and its reported financials point in opposite directions. Underlying sales grew 3.5%, underlying operating margin expanded 60bps, and constant-currency underlying EPS grew 9.5%. Reported turnover fell 3.8%, underlying operating profit fell 1.1%, and underlying EPS grew 0.7%. Currency cost 5.9 points of turnover and 8.8 points of EPS, driven by Latin American currencies, the Indian rupee, the US dollar and the Turkish lira against the euro.
"On a constant currency basis, underlying earnings per share grew by 9.5%."
— Srinivas Phatak, Chief Financial Officer
The company's own disclosure makes the exposure explicit: the average euro rate moved from 5.761 to 6.297 against the Brazilian real, 90.652 to 97.630 against the Indian rupee, 36.671 to 49.277 against the Turkish lira, and 1.085 to 1.124 against the US dollar. With 59% of turnover in emerging markets and the group reporting in euros, this is not a one-off. The CFO went further and tied it to the cost line as well.
"The second aspect, which is important and sometimes overlooked, is that half our inflation classically comes from imported inflation or currency devaluation in the emerging markets."
— Srinivas Phatak, Chief Financial Officer
Assessment: Constant-currency reporting is legitimate and Unilever's version is well-disclosed, but a euro-reporting shareholder was paid €3.08 rather than €3.35, and that gap does not reverse. Any investment case built on the constant-currency number is implicitly a bet on emerging-market currencies stabilising against the euro, which is a macro call unrelated to the quality of Unilever's execution. Underwrite the reported number.
Gross Margin: Three Straight Years and a Structurally Different Base
Gross margin of 46.9% is up 20bps and is the third consecutive annual increase. More important than the increment is the level: with Ice Cream, a lower-margin and more capital-intensive business, now demerged, the starting point for future expansion has moved up permanently. The CFO framed the cumulative move rather than the year.
"If you really read, we have now consecutively increased our gross margins for the last 3 years, and the increases have actually been sizable, over 330 basis points."
— Srinivas Phatak, Chief Financial Officer
"What we now start at 46.9% is a structurally and a sustainably high gross margin business."
— Srinivas Phatak, Chief Financial Officer
The named levers are mix (portfolio and geography), a procurement savings programme management says is now beating the market across more commodities and more countries, enhanced commodity risk-management practices, and capital allocation, with more than half of capital expenditure directed to savings projects for the past two years.
Assessment: The most durable part of the equity story and the one that most clearly separates this Unilever from the pre-2024 version. A 330bp cumulative gross margin gain across three years is not a cost cycle; it is a mix and procurement capability. It is also what funds the advertising step-up without margin give-back, which is the actual mechanism by which the strategy is supposed to work.
Brand Investment at 16.1%, the Highest in Over a Decade
Brand and marketing investment rose 10bps to 16.1% of turnover, up roughly 300bps over four years, and 100% of the incremental spend went to Power Brands, concentrated in Beauty & Wellbeing and Personal Care. The CEO closed the call by putting the number in historical context.
"We're investing now 16% of our revenue in our brands, 3 years ago, we were at 13%."
— Fernando Fernandez, Chief Executive Officer
The choice is visible in the segment margins: Beauty & Wellbeing's margin fell 20bps precisely because it absorbed a significant increase in brand investment, while overhead savings in that segment improved significantly.
Assessment: Directionally right and the single most shareholder-friendly form of margin dilution available. The test is whether the spend converts. Dove growing 9% with 7% volume on top of 7% volume growth the prior year, and Vaseline delivering double-digit volume growth for a second consecutive year, are the two cleanest pieces of evidence that it does. The absence of a stated ceiling on brand investment is a mild concern for anyone modelling margin.
The Productivity Programme, Running Ahead of Plan
The €800 million productivity programme launched in 2024 has now delivered €670 million cumulatively, above the €650 million previously expected, with the remaining €130 million due in 2026. Overheads improved 50bps for the year, more than offsetting inflation and the stranded costs left behind by the Ice Cream separation.
"Cumulatively, we have now delivered about EUR 670 million of savings."
— Srinivas Phatak, Chief Financial Officer
The CFO was careful to describe the programme as the start of a habit rather than a discrete event, which matters because a finite savings pool that finishes in 2026 would otherwise create a margin cliff in 2027.
"Culturally and philosophically, we will keep overheads increases lower than sales."
— Srinivas Phatak, Chief Financial Officer
Assessment: Credible, and the numbers support it: restructuring costs fell from €710m to €599m even as savings delivery accelerated, which is the right relationship. The commitment to keep overhead growth below sales growth is a useful modelling anchor, though it is an aspiration rather than a quantified target and becomes harder to honour if 2026 top-line growth undershoots.
Power Brands Versus the Other 22%
Power Brands are now 78% of turnover, up from around 75% eighteen months ago, and grew 4.3% for the year with 2.2% volume, accelerating to 5.8% with 3.5% volume in the fourth quarter. The remaining 22% is going the other way, and management quantified it without prompting.
"When you look at the non-Power Brands, 22% of our revenue, for the year, we delivered a volume growth negative of 1%. It has accelerated to minus 3% in the quarter 4."
— Fernando Fernandez, Chief Executive Officer
Weighting the disclosed Q4 Power Brand growth of 5.8% at 78% of turnover against the group's 4.2% implies the other 22% ran at roughly negative 1.5% underlying sales growth in the quarter, a gap of more than seven points between the two parts of the portfolio. Management attributed the fourth-quarter deterioration to deliberate discontinuations plus geographic mix, and declined to quantify the discontinuation effect when asked directly.
Assessment: A concentration strategy working exactly as designed produces this pattern, so the spread is not itself alarming. What is worth tracking is the direction: the drag doubled between the full year and the fourth quarter, and 22% of €50.5bn is €11bn of revenue with negative and worsening volume. Whether that tail is shrunk by disposal, managed for cash, or left to decay is the open question, and management has not laid out a framework for it.
Emerging-Market Resets: Indonesia, China, India
The emerging-market inflection is the most consequential operational development in the print. India grew 4% for the year with 3% volume, accelerating to 5% with 4% volume in the fourth quarter on share gains and the normalisation of trade following third-quarter GST disruption, with Home Care reaching its highest ever market share. China was flat for the year but grew mid single digit in the fourth quarter after a reset of route to market and a push on premiumisation. Indonesia grew 4% for the year with a sharp second-half recovery after what management called a comprehensive reset, including a relaunch of its eight top brands and distributor stock at historically low levels.
"We are now operating with very, very historic low levels of stock in our distributors. That has removed any fundamental issue of channel price conflicts we have had in the past."
— Fernando Fernandez, Chief Executive Officer
The fourth-quarter Indonesian number, however, comes with an explicit caveat from the company itself.
"Fourth quarter growth was 17% due to our operational improvements and significant de-stocking in the prior year, which will not benefit future periods."
— 2025 Full Year Results announcement
Assessment: The resets look real, and the metric management says it watches in Indonesia (sequential improvement in sales run rate, up in each of the last four quarters) is the right one. But the group's fourth-quarter acceleration is materially levered to a 17% Indonesian print that the company has told the market will not repeat. That single sentence in the release does more to define the 2026 risk than anything said on the call.
Latin America and the Self-Inflicted Errors
Latin America grew 0.5% for the year with price of 5.9% almost entirely offset by a 5.1% volume decline, then returned to 3.2% growth in the fourth quarter, still with volume down 3.6%. Management was unusually direct about the cause.
"We have intervened in some areas in which, as I mentioned before, we have scored some own goals, particularly in Home Care pricing and in Deos format focus."
— Fernando Fernandez, Chief Executive Officer
The two fixes are specific and datable: a corrective price reduction in Brazilian fabric cleaning, which brought Home Care back to growth in the fourth quarter, and a rebalancing of deodorant investment toward aerosol formats and away from contact applicators, with planograms being reset across thousands of stores and the benefit expected from the second quarter of 2026 onward. Aerosols carry higher revenue and profit per use, so the mix shift is margin-accretive as well as volume-accretive if it works.
"I have been associated with Latin America for many years. I have never seen 2 bad years in a row in Latin America."
— Fernando Fernandez, Chief Executive Officer
Assessment: Naming your own errors and attaching a quarter to the fix is the behaviour of a management team that intends to be measured. The deodorant recovery is now an explicit, dated commitment and belongs at the top of next quarter's checklist. The framing of the closing quote is worth noting: pattern recognition is not a forecast, and Brazilian and Mexican macro conditions are outside the company's control.
North America: Three Years of Volume, and a Softer Fourth Quarter
North America grew 5.3% for the year with 3.8% volume, the best developed-market performance in the group, before moderating to 2.8% with 1.3% volume in the fourth quarter as category growth softened. Management put the multi-year record on the table as the answer to whether the deceleration is structural.
"our volume growth in North America in the last 3 years has been 3.9% in 2023, 4.2% in 2024, 3.8% in 2025."
— Fernando Fernandez, Chief Executive Officer
The explanation for the fourth quarter was a weak October in physical retail, with a rebound described in December and January, and continued double-digit growth in digital commerce with the large US marketplaces. Wellbeing's slowdown to about 5% volume growth from double digit was flagged as the main drag, alongside a stated expectation of a soft first quarter against strong comparatives.
Assessment: The three-year volume record is genuinely impressive for a staples portfolio and is the strongest single piece of evidence that the portfolio rotation toward Beauty, Wellbeing and Personal Care has worked commercially. The wrinkle is that management has now pre-announced a soft first quarter in its best developed market while also guiding the full year to at least 2% volume, which puts more weight on the back three quarters than a first guide of the year usually carries.
Europe: Home Care Wins, Foods Drags
Europe grew 1.5% for the year and 0.1% in the fourth quarter, with volume turning slightly negative in the quarter. The pattern within it is consistent: Home Care and Personal Care are gaining share behind Wonder Wash and Whole Body Deodorants, while Foods, which management identified as roughly 40% of the European business, is soft. Country performance was uneven, with good growth in France and Italy, a solid UK, and weakness in Germany, the Netherlands and Poland. Retailer negotiations were described as progressing normally.
"Probably the biggest issue in Europe has been in Foods, that has been gradually soft, particularly in Netherlands, Germany."
— Fernando Fernandez, Chief Executive Officer
Assessment: Europe is 19% of turnover and is now growing at roughly zero. The mix problem is structural rather than executional, since the segment that is 40% of the region is the one in decline, and Unilever's own answer is that it continues to outperform a declining market. Outperforming a shrinking category is a defensible position and a poor source of growth.
The Ice Cream Demerger, the Retained Stake and the Transitional Services Agreement
The demerger completed on 6 December 2025, with 80.15% of The Magnum Ice Cream Company distributed to shareholders and 19.85% retained, listed in Amsterdam, London and New York on 8 December. The accounting is substantial: Ice Cream was valued at €8.4bn against a carrying value of net assets of €4.0bn, producing a €4,409m gain before a €1,036m recycling of cumulative currency translation, for a €3,373m total gain recognised in discontinued operations. Ice Cream contributed €7,691m of turnover and €677m of operating profit for the eleven months of ownership. Statutory basic EPS of €4.33 therefore includes €1.73 from discontinued operations and is not a number to value the business on.
Three consequences carry into 2026. The retained 19.85% stake, carried at €1,655m within financial assets at year end, is to be sold down to pay demerger costs and maintain capital flexibility, with no timetable given. Net debt fell €1.4bn to €23.1bn, helped by a €3bn payment from Magnum to Unilever ahead of separation as Magnum raised its own debt facilities. And a transitional services agreement covering IT, marketing, co-packing and commercial services runs for up to two years, with Unilever continuing to invoice and collect cash on Magnum's behalf, which is what produced the unusual gross-up in receivables and payables in the working capital line.
Assessment: Cleanly executed and the strategic logic is sound: a simpler group, a structurally higher gross margin, roughly 100bps of ROIC benefit and lower capital intensity. The residual items are modelling nuisances rather than risks. The one thing an investor cannot currently size is the transitional services agreement, discussed below.
Capital Allocation: A New Buyback and a Stated 70/30 Preference
Unilever returned €6.0bn to shareholders in 2025, comprising €4.5bn of dividends and €1.5bn of buybacks, and announced a new €1.5bn buyback expected to commence in the second quarter of 2026. The fourth-quarter dividend of €0.4664 per share is up 3.0% versus the third quarter. The CFO articulated a standing preference between the two.
"This reflects our capital allocation priorities with a clear preference to maintain in principle a 70-30 balance between dividends and share buybacks."
— Srinivas Phatak, Chief Financial Officer
Net debt to underlying EBITDA closed at 2.0x, described as within the target range, and the pension schemes are in a €3.5bn surplus, up from €3.0bn. Capital expenditure ran at 3.1% of turnover with more than half directed to productivity, and the CFO said the group is open to spending more on productivity capital provided each project clears raised internal rate of return and payback thresholds, and provided 100% cash conversion is maintained.
Assessment: Conservative, consistent and adequately funded, which is what a staples balance sheet should be. The buyback is worth roughly 1.5 points of EPS growth, which in a year where operating profit fell in euros was a meaningful part of why EPS rose at all. That is fine as a shock absorber and a poor substitute for growth if it becomes a habit.
The "Fit for the AI Age" Framing
The CEO organised the forward-looking section of the call around three shifts (brands, organisation, people) and seven growth priorities: more Beauty, Wellbeing and Personal Care; the US and India as anchor markets; and premiumisation plus e-commerce across segments and channels.
"We are making our organization fit for the AI age, transforming every link in the value chain, particularly around the consumer."
— Fernando Fernandez, Chief Executive Officer
The specifics offered were demand generation, hyper-targeted marketing content, partnering with consumer-facing large language models, and working with retailers on agentic shopping models. On the people side, the group described the highest ever differentiation between best and worst performers in its reward system, and the One Unilever structure for smaller markets delivered 5.2% growth and more than 250bps of margin expansion on a 35% headcount reduction.
Assessment: The AI framing is thin on quantification and should be discounted accordingly until it appears in a cost line or a share number. The One Unilever data point is not thin: 5.2% growth with 250bps of margin expansion on a third fewer people is a real result and the best evidence on the call that the organisational redesign produces measurable output rather than slideware.
Guidance & Outlook
| Metric | FY 2025 actual | FY 2026 guidance | Direction |
|---|---|---|---|
| Underlying sales growth | 3.5% | Bottom end of the 4% to 6% multi-year range | Step-up implied |
| Underlying volume growth | 1.5% | At least 2% | Step-up implied |
| Underlying price growth | 2.0% | Around 2% | Broadly flat |
| Underlying operating margin | 20.0% | Modest improvement | Up |
| Gross margin | 46.9%, +20bps | Expansion higher than 2025 | Up |
| Commodity inflation | n/a | Lower than 2025, concentrated in palm, canola oil, surfactants | Easing |
| Capital expenditure | 3.1% of turnover | Around 3%, with 55% to 60% toward productivity | Flat |
| Cash conversion | 100% | Committed to 100% | Flat |
| Productivity savings | €670m cumulative | Remaining €130m to complete the €800m programme | Up |
| Share buyback | €1.5bn completed May 2025 | New €1.5bn from Q2 2026 | Maintained |
| Half-on-half phasing | n/a | Margin broadly even; currency headwind heavier in H1 | H2 weighted |
The outlook statement in the release is short and its wording is doing a lot of work: growth "within" the multi-year range, but "at the bottom end" of it, with a "modest" margin improvement. On the call the CEO restated the same thing in plainer language and declined to break it down further.
"We are guiding our topline growth at the lower end of our midterm guidance from 4% to 6%. If we are doing that, of course, there can be some quarters that can be below and some quarters that can be above that 4%, okay? So we will not guide on a quarterly basis."
— Fernando Fernandez, Chief Executive Officer
The CFO's margin bridge was more substantive and rests on gross margin doing more work in 2026 than it did in 2025, with the increment recycled into advertising rather than dropped to the line.
"A combination of these elements, we are quite confident that our gross margin expansion in 2026 is likely to be higher than 2025, and that becomes actually a super important lever for us to actually continue to invest behind our brands."
— Srinivas Phatak, Chief Financial Officer
"As before, margin progression is an outcome of our choices, not a short-term objective in its own right."
— Srinivas Phatak, Chief Financial Officer
Implied ramp: With price guided to about 2% and volume to at least 2%, the 2026 algorithm is essentially the fourth quarter of 2025 held for four quarters (Q4 delivered 2.1% volume and 2.0% price for 4.2%). The regional arithmetic is where it gets demanding. In the fourth quarter, emerging markets at 59% of turnover grew 5.8% and developed markets at 41% grew 1.7%, which weights to approximately the 4.2% reported. If developed markets recover only to about 2% for 2026, emerging markets need to average roughly 5.4% for the year to deliver 4.0% at group level, against the 3.5% they delivered in 2025. That is the bridge management did not draw, and it is the single most important assumption in the guide.
Street at: The print itself landed at or slightly ahead of expectations on every metric with a published consensus, and the guide arrived close to where the Street already had 2026 modelled. The pushback that followed was not about the level but about deliverability, with the prevailing sell-side view characterising the bottom of the range as a stretch rather than a floor.
Guidance style: Cautious, and deliberately so. A company that has just delivered 3.5% against a stated 4% to 6% multi-year range, and then guides the following year to the bottom of that same range, is setting a bar it expects to clear rather than one it expects to stretch for. That is a defensible posture for a management team in its first full year and it removes upside from the near-term setup. It also means the range itself is now on trial: two consecutive years at or below 4% would make the 4% to 6% framing look aspirational rather than operational.
Analyst Q&A Highlights
The 2026 Emerging-Market Bridge
The opening question was the one that mattered most, and it asked for a market-by-market view of whether the resets are finished. The answer was comprehensive on process and confident in tone, running through India's improving brand equity scores and rural execution, China's route-to-market work in e-commerce, Indonesia's distributor destocking and brand relaunches, and improving trends in Vietnam, Pakistan and Bangladesh. What it did not include was a quantified bridge from the group's 3.5% in 2025 to the guided 4%-plus in 2026.
Q: "So first one, Fernando, can you talk a bit about the emerging market outlook for 2026? I think about the big 4, Brazil, India, China, Indonesia. Can you maybe hit on some of the key topics that people are interested in? The fix on Brazil Deos, for example? Is China and Indonesia proper reset? Is it done? How should we think about volumes in '26?"
— Warren Ackerman, Barclays
A: "We are seeing now growth in Asia Pacific Africa, in the territory of 3% volume growth for the market. And our performance is improving across the board."
— Fernando Fernandez, Chief Executive Officer
Assessment: The most useful disclosure in the exchange was the market-level volume figure. If Asian and African categories are growing volume at around 3% and Unilever grew 5.7% volume there in the fourth quarter, the outperformance is roughly 270bps, which is a defensible share-gain rate to extrapolate. That is a better foundation for the guide than the qualitative confidence that surrounded it, and it is the number to check next quarter.
Pricing in a Lower-Inflation Year
The second-most consequential exchange, because if price falls below 2% then volume has to carry more than the guide implies. The response set a normalised long-run expectation, marked 2026 below it, and acknowledged rising promotional intensity in one category without conceding it is broad.
Q: "The first one is on the pricing outlook for 2026. Fernando, can you maybe shed some light on how you expect price growth to play out this year, particularly given the sequentially, I think, lower inflationary pressures you're expecting for '26. And also, it seems a pickup in promo activities in many of your categories and regions."
— Guillaume Delmas, UBS
A: "I think that the category and geographical footprint of Unilever offer in the long run around 3% pricing. That's the kind of normal pricing we have seen in the last 10 years. This year, we probably see that probably a bit lower than that, around 2%. We have seen some increased promotional spending, particularly in promotional intensity, particularly in Foods, but it's not dramatic."
— Fernando Fernandez, Chief Executive Officer
Assessment: A useful admission that structural pricing is roughly 3% and 2026 is being guided a full point below it. That reframes the whole algorithm: the 4% guide is not 3% price plus 1% volume, it is 2% price plus 2% volume, which is a genuinely different and better business, and also a much less forgiving one. If promotional intensity broadens beyond Foods, the price assumption is the first thing to break.
The Building Blocks Behind "Modest" Margin Improvement
The margin question drew the most detailed answer of the call. Management laid out four gross margin levers (mix through portfolio and geography, procurement savings that it says are now beating the market across more commodities and countries, enhanced commodity risk management, and savings-directed capital), then committed to gross margin expansion exceeding 2025's, then explained that the increment is being spent rather than banked.
Q: "Could you maybe walk us through the key building blocks that support your confidence in achieving this modest margin improvement in '26? And in terms of phasing, anything you would flag at this stage, be it for margin or for underlying sales growth?"
— Guillaume Delmas, UBS
A: "The last point in terms of your question on the phasing, while from a margin perspective we don't expect material differences between half 1 and half 2, it's important to highlight that we'll have slightly additional or higher headwinds of currency in half 1."
— Srinivas Phatak, Chief Financial Officer
Assessment: The most quantitatively grounded answer on the call, and the one that most justifies taking the margin half of the guide at face value. Note what the word "modest" is protecting: gross margin is expected to expand more than in 2025, but advertising takes the difference, so the reported margin increment will look smaller than the underlying improvement. That is the right allocation for a business trying to buy volume growth, and modellers should not read a small margin step as weak gross margin delivery.
The Non-Power-Brand Drag
A pointed question on the widening gap between the concentrated 78% of the portfolio and the neglected 22%, and whether the tail becomes a structural drag on reported turnover. The answer supplied the numbers, attributed the fourth-quarter deterioration to discontinuations and geography, and declined to change course.
Q: "And then the second part was, I guess, the Power Brands versus everything else. I guess that was an unusually big difference from what I could remember in Q4. Perhaps you could talk about sort of the non-Power Brand stuff because logically, that was quite a lot weaker. Just kind of how you kind of intend to manage that sort of 25% of the business to make sure that it doesn't become too big a drag on your turnover"
— Jeremy Fialko, HSBC
A: "There are some discontinuation that we have done in that quarter. And also, there is some geographical elements that has played a role there. But we are not -- we continue thinking that the strategy of focusing behind our most strongest assets is the right one."
— Fernando Fernandez, Chief Executive Officer
Assessment: The strategy is right and the answer was still incomplete. Volume in the tail went from negative 1% for the year to negative 3% in the quarter without an explanation of how much is deliberate deletion versus competitive loss, and a follow-up request to quantify discontinuations was also declined. Until that split is disclosed, an investor cannot tell whether €11bn of revenue is being managed down or is simply losing.
Phasing of Growth Through 2026
A direct attempt to get the shape of the year, given a pre-flagged soft US first quarter and an Indonesian comparative that management had already said would not repeat. The answer confirmed the full-year commitment and explicitly refused the quarterly breakdown.
Q: "my first question would be on the sequencing of growth for the year. So you're looking to grow around 4%. I understand maybe pricing, 2%, and volume, above 2%. But then you've been flagging probably some weakness in the U.S. in the first quarter, and I presume a normalization in Asia or at least in Indonesia. So can you talk about how we should expect these to evolve throughout the year?"
— Celine Pannuti, JPMorgan
A: "We have a good start in January, but there is a lot to do in the next few weeks to close quarter 1. But overall, we are confident that we will be delivering that 2-plus percent volume growth for the year and around 4% -- at least 4% for the topline growth."
— Fernando Fernandez, Chief Executive Officer
Assessment: The refusal to phase is defensible practice, but combined with a pre-announced soft first quarter in Wellbeing and in North America, it loads the year into the back three quarters on the first guide. The upgrade in language from "bottom end of 4% to 6%" to "at least 4%" is worth noting; it is a firmer floor than the release wording and the first place to test management's credibility in April.
Latin America's Fourth-Quarter Recovery
A well-aimed question asking whether the Latin American improvement was genuine or a timing artefact that borrowed from 2026. The answer was that nothing had changed versus the prior quarter's framing, that the macro remains difficult and markets flat, and that the improvement is specific to self-help in two categories.
Q: "Just Latin America, which I know, you talked about a little bit, but it feels like that's recovered volume wise a little bit quicker than maybe you were kind of indicating at the third quarter. So just whether that is the case, what was done better that meant that, that's happened?"
— David Hayes, Jefferies
A: "In the case of Home Care, as I mentioned, we are pleased with the reaction to our pricing correction, is showing really impacting our volumes, particularly in Brazil. And in Deos, I believe there is much more to come."
— Fernando Fernandez, Chief Executive Officer
Assessment: An honest answer that resisted the invitation to claim a macro turn. Regional volume was still negative 3.6% in the quarter even as underlying growth reached 3.2%, so the recovery so far is price plus a Home Care volume response, not a broad consumer improvement. The deodorant fix is now dated to the second quarter, which makes it checkable.
Foods Margin at a Record
The question asked whether a 22.6% margin, well above the segment's historical trend, is sustainable. The answer credited portfolio deletion, pack and price architecture in Hellmann's, disciplined account management in Food Solutions, and group overhead savings, then pivoted to a signal about where the segment goes next.
Q: "And then secondly, going back to Food. You had an amazing margin improvement. I think you reached 22.6% margins there. That's well above historical trends. What's the driver behind this improvement, how sustainable it is?"
— Jean-Olivier Nicolai, Goldman Sachs
A: "At an aggregate level, I think we are quite happy with the margins. The focus from here on for us is going to be more drive growth, volume-led growth, and not necessarily a big margin expansion."
— Srinivas Phatak, Chief Financial Officer
Assessment: The most useful forward-looking sentence in the entire Q&A, and a mild negative for 2026 group margin. Foods expanded its own margin 130bps, the largest step of any segment, and on a 26% turnover weight that alone accounts for roughly half of the group's 60bps improvement. Management has now said that engine is being throttled back in favour of volume. Anyone extrapolating Foods margin needs to reset, and the group's "modest" margin guide makes considerably more sense in that light.
The Unquantified Transitional Services Agreement
A housekeeping question that management declined to answer numerically, on an item that runs through operating profit for up to two years and materially distorted the working capital line.
Q: "And the second one, really just a housekeeping issue, but are you able to quantify the magnitude of the TSA receipts that you'll be getting from Magnum?"
— Jeff Stent, BNP Paribas Exane
A: "we are not actually quantifying externally the cost"
— Srinivas Phatak, Chief Financial Officer
Assessment: The qualitative answer was reassuring: cost-plus with a small markup, tapering across 2026 and 2027, and a stated commitment that no stranded costs remain at Unilever. But an unquantified management fee sits inside underlying operating profit and unwinds over the same two years in which the group is guiding to margin expansion. It is a small number that is almost certainly immaterial and it is currently unfalsifiable, which is why it belongs on the watch list rather than in the model.
What They're NOT Saying
- The size of the transitional services fee: declined explicitly, despite it running through underlying operating profit and tapering across the same two years the margin guide covers. Without it, the quality of the 2026 margin step cannot be fully assessed.
- The volume impact of discontinuations: asked directly and not answered. The response redirected to the non-Power-Brand disclosure, which does not separate deliberate deletion from competitive loss. That distinction is the difference between a strategy working and a tail eroding.
- Quarterly or segment-level margin: Unilever discloses underlying operating margin only annually and only by business group. There is no Q4 margin, so the exit-rate profitability that the 2026 guide is built on is entirely unobservable to outsiders.
- How much of the emerging-market acceleration was comparative effect: the release states plainly that Indonesia's 17% fourth quarter benefited from prior-year destocking that will not repeat, but no attempt is made to size the group-level flattering effect. Given emerging markets drove the entire Q4 beat, this is the most consequential omission in the print.
- A quantified currency assumption for 2026: the only guidance is that the headwind is "slightly additional or higher" in the first half. For a company that just lost 8.8 points of EPS to currency, a directional half-on-half comment is thin.
- Any timetable or proceeds expectation for the retained 19.85% Magnum stake: described only as an orderly and considered sell-down to pay demerger costs and maintain capital flexibility, with a €1,655m year-end carrying value and no indication of pace, which leaves a real capital-allocation variable undefined.
Market Reaction
- Pre-print setup: the ADR closed at $73.27 on 11 February, up 12.0% year to date against 1.4% for the S&P 500, up 10.0% over the trailing twelve months and up 13.2% over the trailing thirty days, sitting within $0.41 of its 52-week closing high of $73.68 in a 52-week closing range of $61.81 to $73.68. This was not a stock entering the print with low expectations.
- Reaction session: results were released at 07:00 UK time, ahead of the US open, so 12 February was the reaction day. The ADR gapped down to open at $71.98, a 1.8% decline, traded as low as $71.45 (down 2.5%), then recovered through the session to a high of $73.95 and closed at $73.46, up 0.3% or $0.19.
- Volume: 8.1 million shares against a thirty-day average of 3.0 million, a 2.7x day.
- Relative move: the S&P 500 fell 1.6% on the same session, so the ADR outperformed the index by roughly 190bps on a materially red tape.
- Ordinary shares: the London and Amsterdam lines traded down around 1% intraday, a divergence from the ADR that reflects the US session running several hours past the European close and the currency translation between them.
The intraday shape is the story. The gap down at the open was the guide: a company that has just delivered 3.5% growth telling the market it will grow at the bottom of a 4% to 6% range with only a modest margin improvement, and doing so in the same breath as flagging slower US and European markets, is not an opening that invites buying. The recovery through the session was the print. The quarter itself beat on the metrics with a published consensus, Power Brands accelerated to 5.8%, gross margin expanded for a third straight year, and a fresh €1.5bn buyback landed on top of a 3% sequential dividend increase.
The relative outperformance on a down tape is the more revealing signal. On a session when the index fell 1.6%, holders of a defensive euro-reporting staple with a 3% yield and a newly announced buyback did not sell. That is a rotation bid finding a home rather than an endorsement of the guidance, and it is consistent with a stock that has already run 13.2% in thirty days on positioning rather than on estimate revisions. The 2.7x volume confirms that a large number of shares changed hands to produce almost no net move, which is what disagreement looks like.
Street Perspective
Debate: Is the bottom-end guide conservative or a stretch?
Bull view: The fourth quarter already ran at 4.2% with 2.1% volume, so the guide is simply the exit rate annualised, and it embeds no help from the deodorant fix in Latin America (dated to the second quarter), the completion of the Dove hair rollout by mid-year, the Paula's Choice relaunch in March, the FIFA World Cup activation, or Dr. Squatch entering underlying growth from September. Every one of those is incremental to a base that already clears the bar.
Bear view: The Q4 exit rate is not repeatable in the form it was delivered. It leaned on a 17% Indonesian quarter that the company itself has said benefited from prior-year destocking which will not recur, on a Chinese recovery against soft comparatives, and on Latin America returning to growth with volume still down 3.6%. Meanwhile the half of the group that actually generates volume, developed markets, exited at 1.7% with 0.5% volume, and management has pre-announced a soft first quarter in its best developed market.
Our take: The bear case is arithmetically stronger and the bull case is directionally right on timing. Our reading is that 4% is achievable but requires emerging markets to average around 5.4% for the year, well above the 3.5% they delivered in 2025, which is a demanding assumption dressed as a floor. A first quarter below 3.5% would put the whole range on trial, and management's shift in language from "bottom end" in the release to "at least 4%" on the call means they will be held to the firmer number.
Debate: Should you underwrite constant-currency or reported earnings?
Bull view: Currency is noise that cancels over a cycle. Constant-currency underlying EPS grew 9.5%, which is the true measure of what the business did, and euro strength against emerging-market currencies in 2025 was unusually severe. Reported earnings will inflect sharply the moment the base effects lap, and the market will re-rate the operating improvement it can already see in gross margin and volume.
Bear view: Currency has not cancelled; it has compounded. With 59% of turnover in emerging markets, a euro reporting currency, and structurally depreciating currencies in Brazil, India, Indonesia and Turkey, the translation drag is a permanent feature of the asset rather than a cycle. Half of the group's input inflation is imported for the same reason, so the exposure hits the cost line too. Dividends and buybacks are paid in euros out of euro earnings, and euro earnings fell.
Our take: The bear side wins on evidence. A holder of the ADR received underlying EPS of €3.08 rather than €3.35, and no amount of constant-currency reporting closes that gap. Constant currency is the right lens for judging management's execution and the wrong lens for valuing the equity. We model reported euros and treat any currency reversal as upside we are not paying for.
Debate: Is the portfolio rotation a re-rating catalyst or an expensive treadmill?
Bull view: Fifteen per cent of the portfolio was rotated in a single year, with Ice Cream demerged and ten transactions completed or announced. What is left is a structurally higher-margin, lower-capital-intensity group at 46.9% gross margin and 19.0% ROIC, tilted toward Beauty, Wellbeing and Personal Care, with the US and India as anchors. That mix deserves a higher multiple than the old conglomerate, and the re-rating has barely started.
Bear view: The rotation costs more than it delivers. Disposals subtracted 1.8 points from turnover in 2025 while acquisitions added only 0.6, the acquired brands are expensive (€1,734m of consideration in 2025 against €93m of disposal proceeds), and Dr. Squatch does not even enter underlying growth until September 2026. Meanwhile the 22% of the portfolio left behind is shrinking at 3% on volume. The group is buying growth at the top and losing it at the bottom.
Our take: Both are true and the net is modestly positive. The rotation has demonstrably raised gross margin and ROIC and the Wellbeing assets have performed, with Liquid I.V. through $1 billion, Nutrafol up 23% and Olly above $500 million. But the cash cost is real, the underlying-growth contribution is deferred, and the tail drag is widening. This is a slow, expensive improvement in asset quality rather than a catalyst, and it argues for owning the shares at a discount to the sector rather than at a full multiple.
Model Implications
This is our initiation, so the table below sets our starting estimates rather than revising prior ones. Every 2026 line is anchored to guidance where guidance exists and flagged as our own assumption where it does not.
| Line item | FY 2025 actual | Our FY 2026 estimate | Basis |
|---|---|---|---|
| Underlying sales growth | 3.5% | 4.0% | Bottom of the guided range; requires holding the Q4 exit rate |
| of which volume | 1.5% | 2.0% | Guided floor of at least 2% |
| of which price | 2.0% | 2.0% | Management indicated around 2%, below the 3% structural rate |
| Net acquisitions and disposals | (1.2)% | (0.5)% | Our estimate: Dr. Squatch enters growth in September against announced disposals closing through the year |
| Currency impact on turnover | (5.9)% | (3.0)% | Our estimate: heavier in H1 per management, easing as 2025 base effects lap |
| Turnover | €50,503m | ~€50.7bn | Compounded from the components above |
| Gross margin | 46.9% | 47.2% | Our estimate: expansion above 2025's 20bps, per management |
| Underlying operating margin | 20.0% | 20.3% | Our estimate of a "modest" improvement after brand reinvestment |
| Underlying operating profit | €10,084m | ~€10.3bn | Turnover times margin |
| Underlying effective tax rate | 25.7% | 25.7% | No guided change |
| Diluted average shares | 2,195.3m | ~2,165m | New €1.5bn buyback from Q2 plus the 2025 programme's carryover |
| Underlying EPS | €3.08 | ~€3.20 | Our estimate, roughly +4% |
| Free cash flow | €5,921m | ~€6.2bn | Our estimate: 100% cash conversion commitment without the demerger tax drag |
Valuation impact: The ADR is one-for-one with the ordinary share, which the release confirms by translating the €0.4664 quarterly dividend into US$0.5547 per ADR, an implied rate of about 1.189 dollars per euro. On that basis FY 2025 underlying EPS of €3.08 is roughly US$3.66, so at the 12 February close of $73.46 the shares trade on approximately 20x trailing underlying earnings. Our FY 2026 estimate of €3.20 is roughly US$3.81, or about 19x forward. We set a 12-month target of $76, which is 20x our 2026 estimate and implies +3.5% from $73.46. Adding the annualised dividend of about US$2.22, a 3.0% yield, gives an expected total return of roughly 6.5%, which is a market-like return for a business whose reported earnings are growing at 4%. That is the arithmetic behind the Hold.
The re-rating case requires one of two things we cannot yet underwrite: a currency reversal that converts constant-currency delivery into reported delivery, or evidence that 4% is the floor rather than the ceiling of the multi-year range. The first is a macro bet. The second becomes checkable in April.
Thesis Scorecard Post-Earnings
No prior coverage exists, so this quarter establishes the thesis rather than grading one. The pillars below are the ones we will carry forward and score each quarter.
| Thesis point | Status | Notes |
|---|---|---|
| Bull #1: Structural gross margin reset post-demerger funds brand investment without margin give-back | Confirmed | 46.9%, third consecutive year of expansion, over 330bps cumulative; brand investment at a decade high of 16.1% with underlying margin still up 60bps |
| Bull #2: Power Brand concentration produces above-market growth | Confirmed | 78% of turnover growing 4.3% FY and 5.8% in Q4 with 3.5% volume; 100% of incremental brand investment directed there |
| Bull #3: Emerging-market self-help inflects the group's growth rate | Neutral | Q4 emerging markets at 5.8% with 3.2% volume is genuine progress, but Indonesia's 17% is company-flagged as non-repeating and China's recovery laps soft comparatives |
| Bull #4: Capital discipline sustains returns and shareholder distributions | Confirmed | ROIC 19.0%, 100% cash conversion, net debt down to 2.0x, €6.0bn returned, new €1.5bn buyback |
| Bear #1: Currency translation structurally converts operating progress into reported decline | Confirmed | Turnover (3.8)%, underlying operating profit (1.1)%, underlying EPS +0.7% against +9.5% constant currency; 59% emerging-market exposure makes this recurring |
| Bear #2: Developed-market deceleration removes the reliable volume engine | Confirmed | Q4 developed markets at 1.7% with 0.5% volume versus 3.6% and 2.6% for the year; North America 2.8% versus 5.3%; Europe 0.1% |
| Bear #3: The neglected tail becomes a growing drag on reported turnover | Confirmed | Non-Power Brands, 22% of revenue, volume (1)% for the year deteriorating to (3)% in Q4; discontinuation split not disclosed |
Overall: Thesis established. The operating case is stronger than the reported financials and the reported financials are what shareholders own. Four bull pillars, three of them confirmed outright and one neutral pending evidence that the emerging-market step-up survives the comparatives; three bear points, all three confirmed by this print.
Action: Hold. We would want either a materially better entry price or a first quarter that demonstrates emerging-market growth above 5% without comparative help before moving to Outperform. The commitments to watch into the next print are the deodorant recovery in Latin America from the second quarter, whether developed-market volume stabilises above zero, whether price holds at 2% as promotional intensity broadens, and the first quantified evidence that Wellbeing's fourth-quarter slowdown was customer-specific rather than category-wide.