RKT Reckitt Benckiser Group Plc

By Carol Ryan 

The British company behind Lysol and other disinfectant brands was a clear pandemic winner. Investors have little confidence that last year's sales boom will stick, which seems overly pessimistic.

Reckitt Benckiser, which also owns health-oriented brands such as Durex condoms and Mucinex cold remedies, said Wednesday that sales increased by an unprecedented 11.8% last year compared with 2019, stripping out the impact of portfolio changes and exchange rate moves. Operating margins fell while the company invested heavily in research and development, improved its supply chain and expanded into new markets -- bringing its disinfectant brands to Brazil and Turkey, for example.

Shareholders seem to think the best is over. The company's guidance that sales will grow by just 0% to 2% in 2021 hasn't helped. Reckitt's share price is back at pre-Covid levels, having fallen roughly 25% from its pandemic peak last summer. As a multiple of next year's earnings, the stock trades at 18.7 times. That is cheap for a consumer staples company -- though peers such as Unilever have also underperformed in recent weeks as investors become more focused on economic recovery.

Even if demand for cleaning products ebbs, a portfolio shake-up is under way to root out losing brands. Reckitt has put its Chinese infant nutrition business under review. It is an admission that the previous management team's $17 billion purchase of Mead Johnson in 2017 -- an expensive bet on the Chinese baby food market -- has soured.

Reckitt isn't the only foreign baby-food manufacturer struggling in China. Local competitor Feihe is taking market share from Nestlé and Danone too, and China's birthrate plummeted by 15% last year, according to official statistics. Reckitt also said Wednesday that it has sold its Scholl footcare brand for an undisclosed amount. Together, these two weak businesses contributed around 8% of Reckitt's sales.

If the pandemic makes consumers more germ-conscious long-term, which seems feasible, management thinks that its hygiene brands should grow by up to 5% a year, rather than the 4% rate seen before the health crisis. New lines of business were added in 2020: Reckitt has been signing deals with airlines like British Airways and the Hilton hotel chain to reassure consumers that certain cleaning protocols are being met. These contracts will contribute 1% to sales growth in 2021, Reckitt estimates.

Last year's sky-high demand for products like Lysol was never sustainable. Still, Reckitt Benckiser should come out of the crisis more polished than it is getting credit for.

Write to Carol Ryan at carol.ryan@wsj.com

(END) Dow Jones Newswires

February 24, 2021 09:43 ET (14:43 GMT)

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