By Siddharth Cavale
LONDON (Reuters) - Reckitt Benckiser (L:RB) cut its full-year revenue target after reporting lower than expected second-quarter sales in its last quarter under long-time chief executive Rakesh Kapoor, hurt by a surprise slowdown in demand for infant formula in China.
Shares of the British household goods maker, which had risen the previous day to near their highest level for the year, fell as much as 5.7% in early trade.
The Durex condom and Lysol disinfectant maker said it now expects full-year like-for-like sales growth of between 2% and 3%, down from its previous target of 3% to 4%.
Reckitt, which maintained its "broadly flat" operating margin target, said slowing birth rates over the past two years and increased competition had led to market share losses for its Enfamil infant nutrition products in China, its biggest market for baby food.
The company is also recovering from supply chain disruptions in China, after technical issues at a baby formula factory in the Netherlands, which supplies the Asian market, prevented it from supplying retailers with formula in the third quarter of 2018.
The disruption forced mothers to turn to rival products and in part helped rival Danone (PA:DANO), which last week reported strong infant nutrition sales in China as its strategy to focus on more premium products paid off.
For Reckitt, the slowdown resulted in a surprise 1% drop in like-for like sales in its health business, even as sales of its over-the-counter products, such as Mucinex cough medicine, rebounded after several quarters of decline.
Analysts were expecting Reckitt's Health business, which also sells Scholl foot products and Nurofen tablets, to rise 1.3%.
"Within Health, Infant and child nutrition was a big negative surprise," Bernstein analyst Andrew Wood said, adding he expects the business to grow in the third quarter as it faces an easier comparison with last year.
DISAPPOINTING PERFORMANCE
Overall like-for-like sales were flat in the second quarter, missing the 1.9% growth analysts on average had expected, according to a company supplied consensus.
Net revenue rose 2% to 3.08 billion pounds against analysts' average estimate of 3.13 billion.
The second-quarter report is the last under Chief Executive Rakesh Kapoor, who in September hands over to PepsiCo (NASDAQ:PEP) executive Laxman Narsimhan.
Kapoor said on a media call he was disappointed by the company's performance in the first half but was "confident growth would be second-half weighted."
Kapoor, CEO for the past eight years, said he was bullish that increased investments behind its brands and in medical channels, as well as new products such as Mucinex Night Shift and Enfagrow Pro Mental, and its expansion into new cities in China would help drive that growth.
He also said a plan to split the group into two business units – one for health and one for hygiene and home products - was on track for completion in mid to late 2020.
Still, analysts said the new CEO has a tough task.
"The patchy half-year figures mean the incoming CEO Laxman Narasimhan has a difficult job on his hands to try and put the business back on track, as well as decide the strategic future direction of the group,” investment firm AJ Bell said.
Reckitt shares were down 3% at 6,469 pence by 0830 GMT and were among the biggest losers in the FTSE (FTSE) index.