The Volume Recovery Earns an Upgrade, Even as the Cost Bill Threatens Margins
Key Takeaways
- Emerging-market self-help has survived the easy-comparison test. Underlying sales grew 5.7% in emerging markets, with 4.2% volume growth, even as Indonesia slowed from its exceptional fourth quarter. Latin American volume turned positive and India accelerated.
- The sales beat improves the growth mix, not the earnings forecast. Group underlying sales growth of 3.8% exceeded 3.6% expectations, with 2.9% volume and only 0.9% pricing. We trim FY2026 underlying EPS to €3.19 from €3.20 as higher costs offset better operating momentum.
- Margin protection now depends on pricing without undoing the recovery. Expected annual cost inflation rose €350–500 million above the initial plan. The Foods combination with McCormick adds strategic potential, but also separation costs and execution risk.
- Rating: Upgrading to Outperform from Hold. At $58.98, the shares offer about 17.3% expected 12-month total return to our reduced $67 target. The price now compensates for risks that kept us on the sidelines in February.
Results vs. Consensus
The March quarter supplies evidence of commercial recovery: more volume, broader emerging-market participation and another strong contribution from the biggest brands. It does not establish that profits have accelerated. This trading statement covers sales for the three months ended March 2026; quarterly EPS, gross margin, operating margin and cash flow were not disclosed. All sales comparisons below exclude the demerged Ice Cream business and still include Foods.
| Q1 FY2026 metric | Actual | Consensus | Assessment |
|---|---|---|---|
| Underlying sales growth | 3.8% | 3.6% | Beat by 20bps |
| Underlying volume growth | 2.9% | n/a | Stronger volume contribution |
| Underlying price growth | 0.9% | n/a | Below the roughly 2% annual pricing assumption in our prior forecast |
| Turnover | €12,562m | n/a | Down 3.3% year on year |
| EPS / gross and operating margins | Not disclosed | n/a | No quarterly earnings or margin assessment |
| Free cash flow | Not disclosed | n/a | Next financial-statement update at half year |
Year-over-year sales comparison
| € million, continuing operations | Q1 2026 | Q1 2025 | YoY change |
|---|---|---|---|
| Beauty & Wellbeing | 3,103 | 3,280 | (5.4)% |
| Personal Care | 3,278 | 3,260 | +0.6% |
| Home Care | 2,977 | 3,057 | (2.6)% |
| Foods | 3,204 | 3,393 | (5.6)% |
| Unilever | 12,562 | 12,990 | (3.3)% |
Sequential comparison of quarterly growth rates
These are each quarter’s year-over-year growth rates, not sequential growth in sales. Turnover of €12,562 million compares with €12,586 million in Q4, a 0.2% sequential decline before allowing for seasonality.
| Metric | Q1 2026 | Q4 2025 | Change in growth rate |
|---|---|---|---|
| Group underlying sales growth | 3.8% | 4.2% | (40)bps |
| Group underlying volume growth | 2.9% | 2.1% | +80bps |
| Group underlying price growth | 0.9% | 2.0% | (110)bps |
| Emerging-market volume growth | 4.2% | 3.2% | +100bps |
| Developed-market volume growth | 0.9% | 0.5% | +40bps |
| Latin American volume growth | 2.6% | (3.6)% | +620bps |
Quality of Beat/Miss
Sales: Volume is doing more of the work even as headline underlying growth slows. Price reductions that restored competitiveness in Brazil and India are still depressing the pricing line, while acquisitions add to reported sales outside the underlying measure. Currency-related items reduced turnover by 7.7%; acquisitions added 1.4% and disposals subtracted 0.5%. That leaves euro turnover down 3.3% despite the organic improvement.
Margins: The mix of growth is commercially encouraging but not automatically margin accretive. Home Care, the lowest-margin business in FY2025, is growing fastest and faces the greatest cost pressure. More sales at restored competitive prices can improve factory absorption, but the next round of price increases will test how much of that volume can be retained.
Earnings: We do not extrapolate the sales beat into an EPS beat. The existing currency risk persists in reported turnover, and the higher input-cost outlook offsets the benefit of stronger volume in our annual estimate. The July financial statements will be the first direct test of this year’s margin delivery.
Segment Performance
| Q1 2026 business group | Turnover (€m) | USG | Volume | Price | Q4 2025 USG |
|---|---|---|---|---|---|
| Beauty & Wellbeing | 3,103 | 3.6% | 1.9% | 1.6% | 4.7% |
| Personal Care | 3,278 | 3.7% | 1.1% | 2.5% | 5.1% |
| Home Care | 2,977 | 6.1% | 6.2% | (0.1)% | 4.7% |
| Foods | 3,204 | 2.2% | 2.4% | (0.2)% | 2.3% |
| Unilever | 12,562 | 3.8% | 2.9% | 0.9% | 4.2% |
Beauty & Wellbeing: the core brands carry a weaker growth vertical
High-single-digit Hair Care growth, improving Sunsilk and Clear, and strong prestige brands kept the business growing while Wellbeing declined. The contrast matters to the prior Power Brand thesis: investment is producing visible results in established franchises, including Dove’s hair relaunch, but the acquired wellness portfolio is not yet a dependable incremental growth engine. Turnover fell 5.4% as a 9.1% currency-related drag overwhelmed underlying growth.
Assessment: The commercial strategy remains credible, but the expected Wellbeing recovery moves to the next quarter. Liquid I.V.’s assortment pressure and Nutrafol’s acquisition costs now look more persistent than a single customer disruption. We retain the growth opportunity while giving it no near-term margin premium.
Personal Care: better volume, with the larger Latin American benefit still ahead
Volume improved from 0.6% in Q4 to 1.1%, although lower pricing reduced underlying growth to 3.7%. Dove led deodorants and skin cleansing, while Rexona and Axe improved as Brazil’s format correction began to work. Latin American deodorants returned to growth before the larger Q2 uplift management had identified in February. The 4.8% acquisition contribution, including Dr. Squatch and Wild, helped reported turnover grow 0.6% despite currency pressure.
Assessment: This meets an early signpost of the prior recovery case, rather than completing it. Retail shelf resets and World Cup activation should contribute more in Q2. The test is sustained volume after those campaigns, since recent pricing support has diminished and aggregate segment volume is still below the group’s annual 2% floor.
Home Care: the strongest execution evidence and the biggest cost exposure
Volume grew 6.2%, led by Brazil and India. The mechanism is tangible: more competitive powder prices recovered demand, while liquids expanded through innovation and distribution. Wonder Wash now reaches 41 countries and around €200 million in annualised sales. Home & Hygiene and Fabric Enhancers also grew, so the recovery extends beyond one laundry launch.
Assessment: Last quarter’s most encouraging division strengthened further. Yet the policy that won volume is about to change: Home Care accounts for roughly half of expected cost inflation, and management intends to raise prices. We expect a more balanced volume/price contribution, with some margin pressure possible even if the group meets its annual margin target.
Foods: volume improves before a major change in ownership
Volume growth rose to 2.4% from 1.3% in Q4, but slightly negative pricing held underlying sales growth to 2.2%. Hellmann’s remained a growth driver and Food Solutions improved as Chinese out-of-home consumption recovered gradually. Developed-market sales were flat. This is a better volume outcome for the business that exited 2025 at a 22.6% underlying operating margin, when management said growth would take priority over further large margin gains.
Assessment: The shift toward volume is delivering, but Foods still dilutes group growth. The McCormick agreement offers a more focused owner and potential synergies; until completion, Unilever must keep the business performing while it separates systems and staff. Its profits remain part of our FY2026 estimates.
Geography: the emerging-market recovery broadens as Europe weakens
| Q1 2026 geography | Turnover | USG | Volume | Price |
|---|---|---|---|---|
| Asia Pacific Africa | €5,596m | 5.9% | 5.0% | 0.9% |
| The Americas | €4,691m | 3.7% | 2.4% | 1.3% |
| Europe | €2,275m | (0.9)% | (1.2)% | 0.3% |
| Emerging markets | €7.6bn | 5.7% | 4.2% | 1.5% |
| Developed markets | €5.0bn | 1.0% | 0.9% | 0.1% |
| North America | €2.7bn | 2.1% | 2.2% | (0.1)% |
| Latin America | €2.0bn | 6.2% | 2.6% | 3.5% |
Assessment: The regional evidence changes our judgment on emerging-market self-help. India grew 7% with 6% volume; Indonesia delivered a more sustainable 4% after Q4’s destocking-assisted 17%; China maintained mid-single-digit growth; and Latin America returned to volume growth. Aggregate emerging-market growth stayed above 5% despite Indonesia’s normalisation. Developed-market volume also remained positive, meeting the narrower February signpost, although Europe’s 1.2% volume decline prevents a broad recovery call.
Key KPIs
| Operating signpost | Q1 2026 | Eligible prior benchmark | Investment read |
|---|---|---|---|
| Power Brands | 78% of sales; 5.0% USG; 4.0% volume | Q4: 5.8% USG; 3.5% volume | Stronger volume despite lower sales growth |
| Group two-year volume CAGR | 2.0% | Q1 2025 volume growth: 1.2% | Recovery has substance beyond the single-year comparison |
| Cumulative productivity savings | €750m | €670m at FY2025 | €80m additional savings; €50m to original programme target |
| Wellbeing sales growth | About (2)% | Q4 volume around +5% | Different metrics, but the current sales decline raises the recovery burden |
| Quarterly dividend | €0.4664 / $0.5449 per ADR | €0.4664 in Q4 | Flat sequentially; +3.0% in euros year on year |
| Current buyback | €1.5bn commenced April 30 | Q2 start promised in February | Capital-return commitment delivered |
Key Topics & Management Commentary
Overall Management Tone: Management remained confident about commercial execution and was more specific about the cost challenge than in February. The guarded part of the call concerned how pricing, demand and margin would interact in the second half; the unchanged guide came with an explicit cost assumption and a plan to revisit the outlook at half year.
1. Emerging-market recovery clears the prior operating hurdle
Our February Hold identified dependence on Indonesia’s unusual comparison as a weakness in the 2026 growth case. Q1 reduces that concern: emerging-market volume accelerated even with Indonesian growth back at 4%. Brazil’s response to corrected laundry prices, India’s broader distribution and premium products, and China’s improved execution provide separate sources of demand.
Assessment: We move emerging-market self-help from AT RISK to ON TRACK. It is no longer necessary to assume a repeat of the exceptional Indonesian quarter to support a roughly 4% group sales-growth forecast. This is the main fundamental reason the lower share price is investable.
2. Low pricing is partly the cost of repairing competitiveness
Q1 pricing of 0.9% falls short of our prior roughly 2% annual assumption. Carryover reductions in Brazilian laundry and Indian liquids, Indian tea deflation, and additional in-store activation in Personal Care all contributed. The volume response suggests that some of this sacrificed price has earned a return. It also shows why restoring the pricing line is not a free addition to sales growth.
Assessment: We lower the annual pricing assumption to 1.5% and raise volume to about 2.5%, leaving underlying growth around 4%. This accommodates pricing recovery later in the year without assuming every increase can be passed through without affecting demand.
3. The inflation shock puts the gross-margin thesis at risk
Management now expects €750–900 million of total annual inflation, including logistics and factory costs, versus an initial expectation roughly €350–500 million lower. Its working crude-oil assumption is around $100 a barrel. About half the inflation is in Home Care and roughly 70% of the total is in emerging markets. The incremental burden alone equals about 70–100bps of our forecast revenue before mitigation.
The levers are procurement, formulation and packaging changes, logistics, lower discretionary costs, additional productivity and pricing. These can absorb part of the shock, but the CFO acknowledged a possible delay between costs arriving and prices taking effect. The February commitment to expanding gross margin by more than 2025’s 20bps is consequently harder to underwrite, even though the group still expects modest operating-margin expansion.
Assessment: We move the structural gross-margin pillar to AT RISK and reduce our FY2026 operating-margin estimate from 20.3% to 20.1%. Every €100 million of cost left unmitigated would reduce annual underlying EPS by roughly €0.03–0.04 under our tax and share assumptions. The new risk is the cost/pricing mismatch, not evidence that Q1 profits have already missed.
4. Productivity and advertising flexibility protect the annual guide
The original €800 million productivity programme has delivered €750 million, with management now expecting completion in Q2 and further savings beyond it. That fulfils most of the €130 million outstanding at year-end, but only €50 million remains against the original target. Protecting margin therefore also requires new savings and competitive pricing.
Management described brand investment of 15–16% of sales as competitive, compared with 16.1% in 2025, and said it could adjust the channel mix if media prices softened. A lower spending ratio need not weaken brands if buying efficiency improves, but it would change the earlier picture of gross-margin gains funding ever-higher investment.
Assessment: The operating-margin target has credible support, but its composition is less attractive than in February. We expect disciplined investment and a small margin improvement; an outcome achieved principally by cutting brand support would weaken the Power Brand thesis even if the headline margin target were met.
5. Wellbeing needs two different repairs
The sales decline of about 2% includes a difficult prior-year comparison, but the call supplied more than a timing explanation. Liquid I.V. faces new entrants reducing its assortment share, alongside different shipment timing. Nutrafol was broadly flat, with high retention but more expensive customer acquisition. Olly’s 18% growth was not enough to offset the weakness.
Assessment: This is a deterioration in an existing watch item. A Liquid I.V. recovery is now expected in Q2, while Nutrafol’s improvement is weighted to H2. The distinction matters: shipment timing can reverse quickly, while repairing acquisition economics may require additional spending or slower new-customer growth.
6. Power Brands are delivering while the tail remains a drag
Power Brand volume rose 4.0%, ahead of the group’s 2.9%, and Dove and Vaseline continued to demonstrate the benefits of concentrated investment. The rest of the portfolio again grew more slowly. Management identified reduced support for smaller beauty and personal-care brands and deflation in Indian tea, but supplied no complete split between deliberate pruning and competitive losses.
Assessment: The concentration strategy remains ON TRACK, while the neglected-tail risk stays unresolved. Stronger lead brands can support group growth without every smaller brand recovering, but the widening allocation of attention makes the cost of any future stumble in Dove or another large franchise more significant.
7. Foods separation changes the form of exposure, not its immediate disappearance
The March agreement would combine the specified Foods businesses with McCormick. Unilever shareholders would receive 55.1% of the combined company, Unilever would retain 9.9%, and McCormick shareholders would own 35.0%. Unilever would also receive $15.7 billion of cash, subject to closing adjustments. The deal excludes, among other assets, Foods in India, Nepal and Portugal and Lifestyle Nutrition. Completion is expected by mid-2027 at the latest, subject to approvals.
The industrial logic is credible: a focused food group could invest more consistently in Knorr and Hellmann’s, while Unilever concentrates on home and personal care. But the expected €400–500 million of stranded costs must be removed over 2027–2029, with another €500 million of restructuring cost. The projected $600 million of annual net cost synergies sit in the combined foods company, not wholly in the remaining Unilever.
Assessment: This is strategic upside with material execution requirements. Our target values the existing consolidated earnings stream and adds no separate synergy, cash-proceeds or distributed-share premium. If completion occurs within our 12-month horizon, the economic target refers to the combined value of the residual UL holding and the distributed interest.
8. Capital returns offer support without making the transaction free
The €1.5 billion buyback began on April 30 and is scheduled to finish by July 6, satisfying the prior Q2-start commitment. The quarterly euro dividend is unchanged sequentially and 3% higher year on year. Management plans €6 billion of buybacks during 2026–2029, including this programme, supported by transaction cash after separation costs, tax and debt requirements.
Assessment: Repurchasing shares at the lower valuation improves per-share economics, and the dividend supplies a meaningful part of expected return. We retain capital discipline as ON TRACK. The broader buyback plan is conditional on the transaction cash and cannot be counted as incremental value on top of an undiminished Foods earnings stream.
Guidance & Outlook
| FY2026 item | February position | April position | Our interpretation |
|---|---|---|---|
| Underlying sales growth | Bottom end of 4–6% | Unchanged | About 4% remains an appropriate base |
| Underlying volume growth | At least 2% | Unchanged | Q1 provides a better starting point |
| Underlying operating margin | Modest increase from 20.0% | Unchanged | Lower confidence after cost revision |
| Turnover currency effect | No numerical guide | Around (3)% at April spot rates | Quantifies a risk previously only described directionally |
| Total cost inflation | Initial plan lower by €350–500m | €750–900m; crude assumption about $100 | Main change to the earnings risk |
| Productivity programme | €800m by end-2026 | Expected completion in Q2; additional savings sought | Earlier delivery, finite original savings pool |
Required run rate: A simple quarterly-growth average would require about 4.1% underlying growth in Q2–Q4 to reach 4.0% for the year after Q1’s 3.8%. The corresponding volume hurdle is about 1.7% to reach 2.0%. These are approximate pacing indicators, since the annual measures use their own sales weights. The annual floor no longer requires a dramatic volume acceleration, but our 2.5% volume forecast still assumes the recovery broadly persists.
Guidance style: Management’s reluctance to raise the sales outlook is reasonable. More pricing could increase nominal growth, while energy costs squeeze household demand and the strongest category absorbs the largest input shock. Management plans to reassess the outlook at half year. We keep underlying growth at 4.0%; the quarterly sales beat does not establish a full-year earnings upgrade or a fresh annual consensus comparison.
Analyst Q&A Highlights
The following exchanges summarise the questions and responses, preserving their conditions and timing.
How much inflation can the margin commitment absorb?
Question: The challenge was whether higher oil costs left enough room in productivity and pricing to meet the margin guide.
Response: The CFO quantified annual inflation at €750–900 million using roughly $100 crude, distinguished commodity inflation from currency and factory costs, and described the measures needed to protect margin. He acknowledged that savings alone might not cover the burden and that selected price increases were necessary.
Assessment: This was a substantive answer with a useful condition. It supports a modest margin gain in the stated cost environment, not a guarantee against indefinitely higher oil. Our smaller forecast margin increase reflects both the mitigation plan and the risk of price lag.
Is Wellbeing weakness only a difficult comparison?
Question: The exchange asked how the US differed from international markets and what was happening at Liquid I.V. and Nutrafol.
Response: Management said international growth was too small to change the US-led outcome. It cited more than 40% prior-year growth at Liquid I.V., different shipment timing and competition for assortment. Nutrafol retained customers well but faced higher acquisition costs. Liquid I.V. was expected to improve in Q2 and Nutrafol in H2.
Assessment: The answer makes a purely calendar-based explanation less persuasive. February’s customer-specific problems have developed into separate commercial repair tasks, with distinct deadlines. We would need both sales recovery and better customer economics before treating this vertical as a reliable source of estimate upside.
Did customers buy ahead of price increases?
Question: Management was asked whether retailers had stocked up in anticipation of inflation, which could flatter Q1 and borrow sales from later quarters.
“No, we have not seen any significant stocking.”
— Fernando Fernandez, Chief Executive Officer
Response context: Management acknowledged small country-level calendar effects and later allowed that isolated buying-in was possible, but said it saw no material group-level effect. Liquid I.V.’s shipment timing instead favoured Q2.
Assessment: That response supports the quality of the quarter without proving that every market was unaffected by timing. Together with broader regional growth, it reduces the risk that the emerging-market improvement simply repeats Q4’s unusual comparison benefit.
Does the group margin guide also protect Home Care?
Question: After a prolonged period of low pricing, would Home Care still expand margins as its input costs rose, or would other divisions need to compensate?
Response: Management linked prior low pricing to deflation and competitiveness corrections. The CFO said each business should first seek to deliver its own financial plan, but explicitly allowed other businesses to offset short-term Home Care pressure caused by commodity costs arriving before price increases.
Assessment: This narrows what unchanged group guidance establishes. Home Care’s volume success can coexist with weaker divisional profitability. It also makes the performance of Beauty & Wellbeing and Personal Care more consequential to annual earnings than their current sales-growth rates alone suggest.
Are the market-share claims supported across channels?
Question: Separate exchanges tested aggregate market-share trends and a data series suggesting share loss on Amazon, a fast-growing channel.
Response: Management described aggregate value and volume shares as stable, covering around two-thirds of revenue, with recent improvement in India and North American Personal Care. On Amazon, the CFO preferred a different measurement provider and disputed the adverse read. The CEO did not have the Q1 Amazon growth number available.
Assessment: Stable measured shares support competitiveness, but do not establish broad share gains. The Amazon question remains open because a disagreement between datasets is not a quantified channel reconciliation. We rely on the disclosed sales and volume outcomes, not a stronger claim that Unilever is taking share everywhere.
Can Europe recover while Foods is being separated?
Question: The exchange asked whether Europe’s second weak quarter reflected category demand or competition, and whether the McCormick carve-out could distract Foods employees.
Response: Management cited promotional pressure in European Foods, expected only a slight regional recovery, and pointed to World Cup activation and beauty-brand rollout. On separation, it acknowledged employee anxiety, described joint workstreams with McCormick and said it was trying to shorten the timetable.
Assessment: The regional answer is more restrained than the global recovery narrative. Europe should contribute little to our annual growth case. Dedicated separation teams help execution, but the response is organisational evidence, not proof that distraction or stranded costs will be avoided.
What They’re NOT Saying
- A complete cost-to-price bridge: The cost range is quantified; the amount and timing of offsetting pricing, new savings and spending efficiencies are not. This is the largest unresolved variable in our margin estimate.
- Quarterly profitability: Gross margin, divisional margins, EPS and cash flow are absent under the trading-statement cadence. That limits how much operating progress can be inferred from the volume recovery.
- A clean tail-brand split: Deliberate discontinuations and competitive losses remain unseparated. The smaller brands can still subtract from growth even while the concentrated investment strategy succeeds.
- Measured Wellbeing repair: No customer-acquisition-cost trajectory or quantified assortment recovery was supplied. The next test is Liquid I.V. in Q2, followed by Nutrafol in H2.
- Several prior commitments remain open: The broad Dove hair rollout has progressed, but no precise completion audit was supplied, and the March Paula’s Choice relaunch was not separately assessed. Dr. Squatch’s September entry into underlying growth was reiterated, not yet delivered.
- All separation cash flows: Stranded costs and restructuring are sized, but the detailed phasing of transition fees, separation expenses and retained-stake proceeds still leaves uncertainty around the post-transaction earnings and cash profile.
Market Reaction
- Pre-print setup: UL closed at $56.90 on April 29, down 13.0% year to date versus a 4.2% S&P 500 gain. The ADR was down 20.5% over twelve months and 0.1% over thirty days, near the bottom of its $55.45–$74.59 pre-print 52-week closing range.
- April 30 reaction session: The ADR opened at $58.00, traded between $58.00 and $59.27, and closed at $58.98, up 3.7% or $2.08.
- Trading activity and relative performance: Volume was 6.2 million shares against a 5.4 million 30-day average, or 1.2 times normal. The S&P 500 rose 1.0%, leaving UL ahead by about 2.7 percentage points.
The positive reaction is consistent with relief that stronger volume and emerging-market execution could support unchanged guidance despite higher costs. Contemporaneous coverage focused on the sales beat, renewed pricing and the consequences of the Foods transaction. We cannot isolate those drivers from wider market or currency effects, but the relative gain indicates a better reception than the index move alone explains.
The setup matters more to our rating than one day’s rally. February’s shares priced in much of the operating improvement; April’s valuation permits a lower earnings multiple and a slightly lower EPS forecast while still offering a meaningful return. The recovery in the share price during the session does not itself validate the margin plan.
Street Perspective
Debate: a durable volume recovery or a benefit that pricing will reverse?
Bull view: India, Brazil and the lead brands show that the operating changes are translating into purchases. Management’s lack of a material stocking effect improves confidence in the starting point.
Bear view: Some demand was recovered by lowering prices. Raising them again into weaker household budgets may trade away the volume gains, especially where private-label competition is strong.
Our take: The bull case has stronger evidence on current execution; the bear case identifies the central forecast sensitivity. Our 2.5% annual volume estimate is below Q1’s 2.9% and preserves room for some price elasticity.
Debate: unchanged guidance as resilience or a smaller buffer?
Bull view: Procurement, product reformulation, additional productivity and a more diversified supply chain can protect profits. Emerging-market currencies are also less hostile in management’s annual assumptions.
Bear view: The additional cost burden is much larger than the €50 million left in the original productivity programme. Protecting operating margin could require reduced brand investment or higher pricing than demand can bear.
Our take: We accept modest margin expansion as achievable but cut our estimate and valuation multiple. Unchanged guidance means management believes it can offset a new problem; it does not mean the earnings risk stayed unchanged.
Debate: a more valuable portfolio or a more complicated shareholder holding?
Bull view: A focused home and personal-care company and a larger flavour business could each allocate investment more effectively. The cash proceeds support debt reduction and capital returns.
Bear view: Investors receive exposure to a separately listed foods company with integration and financing risk, while Unilever must manage stranded costs. Strategic simplification at the company level does not automatically simplify the investor’s economic exposure.
Our take: The transaction is credible optionality, but no additional deal value is needed for our upgrade. Keeping it outside the target premium avoids making successful separation a prerequisite for an attractive return.
Our Estimates & Valuation
Our FY2026 estimates retain all currently continuing businesses. The stronger volume evidence changes the composition of growth; it does not overcome the new cost risk sufficiently to raise earnings. These are our research estimates.
| FY2026 estimate | Prior recap | Updated estimate | Reason |
|---|---|---|---|
| Underlying sales growth | 4.0% | 4.0% | Better volume offsets lower pricing |
| Volume / price contribution | 2.0% / 2.0% | About 2.5% / 1.5% | Allows volume moderation as pricing returns |
| Net acquisitions and disposals | (0.5)% | 0.0% | Q1 net addition offsets later disposal and annualisation effects |
| Turnover currency effect | (3.0)% | (3.0)% | Now aligned with management’s April-spot indication |
| Turnover | About €50.7bn | €50.95bn | €50.503bn × 1.04 × 0.97 |
| Underlying operating margin | 20.3% | 20.1% | Smaller expansion after inflation revision |
| Underlying operating profit | About €10.3bn | €10.24bn | Revenue × margin |
| Diluted average shares | About 2,165m | 2,158m | Faster buyback at a lower share valuation |
| Underlying EPS | About €3.20 | €3.19 | Incremental profit bridge below |
| Free cash flow | About €6.2bn | About €6.0bn | Allows more working-capital pressure as input costs rise |
Earnings bridge: FY2025 underlying operating profit was €10,084 million and underlying profit attributable to shareholders was €6,761 million. Our €10,240 million operating-profit estimate adds €156 million before tax. Applying the prior 25.7% underlying tax rate to that increment adds about €116 million, with other financing, associate and minority effects held constant in aggregate. About €6,877 million divided by 2,158 million diluted shares produces €3.187, rounded to €3.19. Higher funding costs or minority allocations would reduce this estimate.
Valuation: Our 12-month target is $67, based on 18 times FY2026 underlying EPS of €3.187 and $1.1683 per euro, the conversion implied by the declared €0.4664 / $0.5449 ADR dividend. The ADR represents one ordinary share. At $58.98, the stock trades at about 15.8 times our dollar-translated earnings estimate. The target implies 13.6% price upside; annualising the declared dividend adds about $2.18, or a 3.7% yield, for approximately 17.3% expected total return.
We reduce the target from $76 even as we upgrade the rating. The prior framework used 20 times approximately €3.20 at about $1.189 per euro. A 10% reduction in the multiple to 18 times, slightly lower EPS and a roughly 1.7% lower translation rate explain the lower fair value. The multiple discount allows for a tougher cost environment, Wellbeing execution and the Foods separation. The premium to the current 15.8 times recognises the stronger emerging-market recovery and continuing capital returns, without assuming the former 20-times valuation is restored.
Downside case: At 2.5% annual underlying growth, a 5% currency drag and a 19.0% operating margin, revenue would be about €49.18 billion and underlying EPS about €2.88 under the same incremental tax and share framework. Valuing that at 16 times with $1.10 per euro gives approximately $50.65. Including about $2.05 of dividends at that exchange rate produces a roughly 10.6% negative total return from $58.98. This case captures lost volume, incomplete cost recovery and a weaker euro translation into ADR value; more severe outcomes remain possible.
Rating judgment: We assume an 8% S&P 500 total return over the same twelve months as an analyst hurdle, not a consensus forecast. UL’s roughly 17% base-case return offers enough excess potential to justify Outperform despite the downside. The operational entry condition from February has been substantially met and the purchase valuation has improved. We would reassess if volume recovery reverses as prices rise, if annual margin guidance is cut, or if the separation creates costs beyond the announced framework.
Thesis Scorecard Post-Earnings
| Standing thesis point | Assessment / current status | What Q1 changed |
|---|---|---|
| Bull 1: Structural gross margin reset funds brands without margin give-back | Challenged; ON TRACK → AT RISK | Higher costs make further gross-margin expansion less secure; quarterly margins not disclosed |
| Bull 2: Power Brand concentration produces above-market growth | Confirmed; ON TRACK | 4.0% Power Brand volume versus 2.9% group; stable aggregate measured shares qualify the share-gain claim |
| Bull 3: Emerging-market self-help inflects group growth | Confirmed; AT RISK → ON TRACK | 5.7% growth with 4.2% volume despite Indonesian normalisation |
| Bull 4: Capital discipline sustains shareholder distributions | Confirmed; ON TRACK | Buyback launched as promised; euro dividend maintained sequentially |
| Bear 1: Currency converts operating progress into reported decline | Confirmed; MATERIALIZING | 7.7% turnover drag; annual outlook of about (3)% offers prospective relief |
| Bear 2: Developed-market deceleration removes the volume engine | Partly challenged; EMERGING | Developed volume stays positive at 0.9%, North America improves to 2.2%, Europe weakens |
| Bear 3: Neglected tail becomes a growing drag | Unresolved; EMERGING | Smaller brands remain slower; deliberate pruning versus competitive loss not quantified |
| New risk: Cost recovery and Foods execution | EMERGING | Price elasticity, timing of cost mitigation and separation costs warrant a lower multiple |
Overall: The growth thesis strengthens while the margin thesis becomes less secure. Q1 meets the emerging-market and positive developed-volume signposts, and the Latin American deodorant repair has begun to contribute. Wellbeing remains an unresolved commitment. Currency continues to obscure commercial gains, although management now supplies a less adverse annual estimate.
Action: Upgrade to Outperform. The $67 target and dividend imply about 17.3% total return over twelve months, sufficient compensation for our cost and transaction downside case. The next operating tests are sustained Latin American volume, Liquid I.V.’s Q2 recovery, the original productivity programme’s completion in Q2, and evidence at half year that pricing can protect margin without sacrificing the volume improvement.