DANOY - Danone: Watching Like-For-Like Sales Performance And Volume Growth Going Forward

2024-01-01 20:45:07 ET

Summary

• Danone S.A. has seen encouraging growth in like-for-like sales, with a slow but steady increase in volume growth.
• However, pressure on price reductions still remains.
• I rate Danone S.A. as a hold at this time.

Investment Thesis: I take the view that Danone S.A. ( OTCQX:DANOY ) could see upside if the company meets its like-for-like sales target of 6-7% going forward and deliver further volume growth. Until such time, I continue to rate the company as a hold.

In a previous article back in October, I made the argument that Danone S.A. is unlikely to see upside until such time that we see a significant revival in volume-based growth.

However, the stock has since ascended to a price of $12.95 at the time of writing:

The purpose of this article is to assess the key drivers of growth in Danone S.A., and whether the stock has the capacity to see continued growth from here taking recent performance into consideration.

Performance

When looking at third quarter 2023 results for Danone S.A. (as released on October 26, 2023), we can see that Europe continued to see respectable growth in like-for-like sales of 5.1% as compared to the prior year quarter, but volume was down by 4.1% over the same period.

The China, North Asia, and Oceania region saw the highest percentage growth in sales of 8.4%, and volume was up by 7.3% over the same period.

When looking at full-year results, we can see that while growth in the most recent year came in at a 10-year high - volume had still seen a decline indicating that growth was price-driven as opposed to volume-driven.

With this being said, we have seen price growth start to normalise and volume growth start to rebound - even though the latter has remained slightly negative for this quarter:

In this regard, I take the view that if Danone can continue to show evidence of a rebound in volume heading into Q4, then this could allow for further upside in the stock.

My Perspective and Looking Forward

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I take the view that signs of price normalisation and a slow but steady recovery in volume are encouraging.

While volume growth across China, North Asia & Oceania was vibrant at 7.3%, this market accounted for just over 12% of overall sales while that of Europe accounted for nearly 35% in Q3 2023.

In this regard, a rebound in volume growth across the European market will be particularly important to sustain a rebound in volume demand overall. I had previously stated that with pressures on price growth and government initiatives across the French market to implement price reductions for major supermarket retailers - there was the risk that volume may not rebound and overall sales growth would see a considerable drop.

However, volume has seen an improvement in conjunction with price normalization, and a continuation of this trend would be encouraging. Taking performance across the French market into consideration - which is a highly important market in the context of Europe - performance was more impressive than expected and the company is now expecting like-for-like sales growth of 6-7% as compared to a prior expectation of 4-6%. Growth across Europe was particularly led by initiatives such as the transformation of both the Essential Dairy and Plant-based products businesses.

From this standpoint, I will be keeping a close eye on full-year results to determine whether 1) volume growth can rebound into positive territory given the expected further normalization of price, and 2) like-for-like sales growth can meet the 6-7% target as set out by Danone.

When looking at the 5-year P/E ratio trajectory for Danone, we can see that both Danone and competitor Nestle ( OTCPK:NSRGY ) are trading above 29x, while that of Carrefour ( OTCPK:CRRFY ) is substantially lower at 6.683x.

Additionally, we can see that while earnings have started to rebound - the P/E ratio is still trading significantly higher than in previous years.

From this standpoint, I take the view that Danone S.A. is fairly valued at this point in time - with further growth being possible if we see signs of a rebound in volume demand across the next quarter as well as evidence that Danone can meet its like-for-like sales target of 6-7% for the year.

Risks

In terms of the potential risks to Danone S.A. at this time, while it is encouraging that the company has seen growth in volume and like-for-like sales - it is still possible that Danone could come under greater pressure to lower prices as compared to its peers going forward.

For instance, a significantly greater portion of Danone's products such as yogurt are commodities with several private label alternatives available, whereas Nestle offers a significantly wider array of branded products across several categories that consumers may be more reluctant to switch from - thus allowing for a certain degree of power for the company when it comes to price-setting.

In this regard, price normalisation remains a threat - and the risk remains that like-for-like sales could still come in lower than expected if we see price drops outweigh the effects of volume growth.

Conclusion

To conclude, Danone S.A. has seen encouraging growth in like-for-like sales with a slow yet steady rebound in volume.

In this regard, I take the view that the upcoming quarter will prove a significant telling point as to whether Danone has the capacity to see upside from here. Namely, I will be looking for evidence that the company can meet its like-for-like sales target of 6-7% as well as evidence that volume growth can outweigh any further downward pressure on price.

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