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Unilever is a British consumer giant that is home to hundreds of loved household products - 400 brand names in 190 countries to be exact. This week, our EasyResearch breaks down how Unilever earns from currency fluctuations. More deets on the story below.
When British consumer products giant Unilever (LSE: ULVR) reported its third quarter earnings late last month, it indicated its revenue turnover increased by a whopping 17.8%. For a large business with nearly €16 billion in quarterly revenue, that kind of growth looks outstanding.
Yet looking beyond the headlines, 8.8% -- or nearly half -- of Unilever’s growth came from an unsustainable source: currency fluctuations. Both the British Pound and the Euro were down substantially during the quarter. That made the company’s overseas’ earnings that much more valuable when translated back to home currency terms. As both currencies have begun to bounce back, it is unlikely that the company’s currency-driven lifts will continue.
How currency shifts can drive major swings in earnings
For the sake of simplicity, imagine Unilever only did business in two countries: in its home country of the United Kingdom and in the United States. In order to report its financial results in one single consolidated number, it has to translate all its foreign earnings into British Pounds. The weaker the Pound is vs. the Dollar -- the currency in the United States -- the more Pounds it can report to have earned for every given dollar in sales.
The table below shows an example of how currency fluctuations can impact a company’s reported revenues and profits. Although they are made up of numbers for the purpose of illustration, Unilever did report €3.5 billion worth of sales in Euro terms from North America in its most recent quarter. Given the fact that the US dollar and Euro were near parity during the past quarter, the table does a reasonable job of illustrating how big an effect currency changes can have on the company’s revenue and earnings.
| Revenue in US Dollars | Profit in US Dollars | US Dollars per British Pound | Revenue in British Pounds | Profit in British Pounds |
| $3,500,000,000 | $1,000,000,000 | 1.4 | £2,500,000,000 | £714,285,714 |
| $3,500,000,000 | $1,000,000,000 | 1.3 | £2,692,307,692 | £769,230,769 |
| $3,500,000,000 | $1,000,000,000 | 1.2 | £2,916,666,667 | £833,333,333 |
| $3,500,000,000 | $1,000,000,000 | 1.1 | £3,181,818,182 | £909,090,909 |
| $3,500,000,000 | $1,000,000,000 | 1.0 | £3,500,000,000 | £1,000,000,000 |
Holding those sample revenues and earnings flat in dollar terms, nothing more than changes in the exchange rate can make a huge impact on what the company can report as revenues and profits. When a company’s home currency gets weaker relative to where it does business overseas -- in this case, fewer US Dollars per British Pound -- the stronger its reported earnings can be.
What does that mean for investors?
Frequently, currency fluctuations will reverse themselves over time. That’s especially true when the currencies involved are the major, global ones like the US Dollar, the British Pound, and the Euro. As a result, investors should look beyond the headline numbers when considering how a company’s core business is doing. In Unilever’s case, it reported underlying revenue growth of 10.6%, with pricing accounting for a 12.5% help, somewhat offset by a 1.6% decline in volumes.
That’s a still healthy underlying growth rate from a revenue perspective, but it is important to note that more than all of that underlying growth was driven by pricing. The decline in volumes indicates that consumers are starting to make choices given the incredibly high rates of inflation that are being felt in many places around the world.
As a huge player with business lines in critical industries -- namely things like food, consumer products, and personal beauty care -- Unilever looks capable of making it through the current inflationary times. Still, investors should keep an eye on volumes, the impact of pricing, and underlying revenue growth when considering the true health of the business.
Currency moves can reverse themselves, and the giant boost that Unilever felt with last quarter’s results can just as quickly become headwinds in the future. As of now, those more core measures of underlying revenue growth -- volume and pricing -- still tell a story of a healthy business for Unilever. As people make tough choices due to inflation and focus on the must-haves in their lives, it’s likely that Unilever’s core will remain solid, no matter what currency fluctuations do to its headline numbers.
At the time of publication, Chuck Saletta did not own shares of Unilever.
Sources – EasyResearch
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