Lysol Maker Is Cleaning Up, but at What Cost?

By Carol Ryan 

Reckitt Benckiser's portfolio of household and health brands could have been designed for a pandemic. Keeping up with surging demand for products such as Lysol and Harpic cleaning fluid will be expensive, however.

On Thursday, the U.K.-based company said sales in the three months through March increased by 13.3%, compared with the same period of 2019. That growth was more than double what analysts were expecting and puts Reckitt ahead of other names that are also benefiting as nervous consumers fill up their store cupboards. Procter & Gamble and toilet-roll maker Kimberly-Clark grew by 6% and 11%, respectively, over the same period, for instance.

Chief Executive Laxman Narasimhan, who joined Reckitt from PepsiCo last year, has done an exceptional job given the rickety supply chain he inherited. The company experienced a series of mishaps in previous years after underinvestment in its factories left production capacity too tight. While productivity is improving at its own facilities, the company relied on third-party manufacturers to meet last quarter's demand spike, which will increase operating costs. Reckitt is also investing in factory equipment sooner than planned.

The company isn't alone in this predicament: Other winners from the current crisis, such as Amazon, Walmart and Tesco, face extra expenses that will wipe out some of the gains from surging sales. Unilever, which owns Lifebuoy and Dove soaps, turned to 16 third-party manufacturers in China to ramp up production for certain brands in the early weeks of the crisis. Admittedly, lower commodity prices will offset some of the extra costs for Reckitt, and efficiencies will also kick in as factories narrow the ranges they produce to maximize orders.

Like many European companies, Reckitt gives no profit numbers alongside its first-quarter sales, so investors have to wait until second-quarter results in July to get the bigger picture. For the full year, the company said it would beat sales guidance given in February, but its margin outlook is unchanged. Expectations are high: Reckitt's stock jumped roughly 4% in European morning trading Thursday and now trades at a full 22.4 times expected earnings -- almost as expensive as bigger, more consistent performers Nestlé and P&G.

U.K. grocer Sainsbury shows the need for caution. The stock had been buoyed by strong sales reports in recent weeks, but fell 5% on Thursday after the company said extra expenses and other headwinds would largely offset the benefit of stronger grocery sales in its current financial year.

Reckitt is in the right places at the right time and has removed doubts about its supply chain. The next focus will be on the costs.

Write to Carol Ryan at [e-mail]

(END) Dow Jones Newswires

April 30, 2020 09:32 ET (13:32 GMT)

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