Danone, the French food giant behind brands like Activia yogurt and Evian water, is set to report its third-quarter results soon. According to analysts at UBS, the company's like-for-like sales growth is expected to ease to 3.8% in the third quarter, down from 4.2% in the second quarter. The forecast points to a slight cooling in momentum, but still a healthy pace for a consumer staples company.
What's behind the slowdown?
UBS attributes the expected deceleration to two main factors. First, Argentina's operations will be deconsolidated from Danone's financial statements starting August 1st. This means that from that date, Danone will no longer include Argentina's sales in its reported figures. Argentina has been a high-inflation market, and its deconsolidation removes a source of both sales and volatility.
Second, UBS notes that some key markets are seeing a normalization of growth. After a period of strong demand, particularly in categories like coffee creamers and plant-based products, growth rates are returning to more typical levels. This is a common pattern for consumer goods companies after a surge, as consumers adjust to higher prices and promotional activity stabilizes.
Context: Danone's recent performance
Danone has been navigating a challenging environment for food and beverage companies. Input costs have risen, but the company has managed to maintain growth through price increases and a focus on premium products. In the second quarter, like-for-like sales grew 4.2%, which was ahead of many expectations. The third quarter forecast of 3.8% still represents solid growth, especially when compared to the broader industry.
Investors will be watching the upcoming results closely, not just for the headline number but also for the breakdown by region and category. Danone's performance in North America and Europe, where it faces intense competition, will be key. The company has also been working to streamline its portfolio, selling off some non-core brands to focus on its main categories.
What it means for investors
For everyday investors, a slowdown in sales growth is not necessarily a red flag. Danone is a defensive stock, meaning it tends to perform steadily even when the economy is uncertain. A growth rate of 3.8% is still respectable for a large consumer staples company, and the deconsolidation of Argentina is a one-off accounting change rather than a sign of underlying weakness.
However, the normalization in key markets is worth noting. If growth continues to slow in the coming quarters, it could pressure the stock. But analysts generally view Danone as a stable income play, with a dividend yield that attracts income-focused investors. The company's ability to maintain pricing power will be a key factor to watch.
UBS's view on Danone echoes a broader theme in the consumer sector. Other companies, such as Reckitt, which recently trimmed its sales forecast, are also facing headwinds. Similarly, UBS has predicted that Unilever's growth will cool but still beat forecasts. These trends suggest that the consumer staples sector is entering a phase of more moderate growth after a period of strong demand.
Looking ahead
Danone's management will likely provide an update on its full-year guidance when it reports results. The company has previously reaffirmed its target of like-for-like sales growth of 3% to 5% for the year. The third quarter figure of 3.8% would be within that range, so no change is expected unless there are surprises.
Investors should also keep an eye on currency effects, which can impact reported sales. Danone generates a significant portion of its revenue outside Europe, so a stronger euro could weigh on reported numbers even if like-for-like growth is solid.
In the meantime, the market will be watching how Danone handles the Argentina deconsolidation and whether it can sustain growth in its core markets. The company's focus on health and sustainability, along with its portfolio of trusted brands, should continue to support its long-term prospects.
For those looking at the broader picture, the consumer staples sector is often seen as a safe haven during economic uncertainty. Danone's expected growth, while slightly cooler, still underscores the resilience of everyday food and beverage companies. As always, it's important for investors to consider their own financial goals and risk tolerance when evaluating any stock.
