Financial Times

London - Unilever's European business has returned to growth for the first time in three years, but the group's shares slid last week after heavy investment in the consumer giant's recovery led to slipping profit margins, and new growth targets disappointed the City. The stock fell 5.8 per cent to 1214p.

The Anglo-Dutch group achieved a 3.9 per cent rise in sales in the second quarter, better than analysts had expected, and marking the seventh consecutive quarter of growth after a shock profit warning in 2004. Pretax profits climbed 28 per cent to sterling 1.35bn.

But the recovery came at a price – heavy spending to promote brands ranging from Dove soap to Lipton tea and Ben & Jerry's ice cream ate into the group's underlying margins. Combined with rising energy costs, this pushed margins down 1 percentage point in the quarter.

Rising commodity prices have hit Unilever, with the cost of tea up 10 per cent, aluminium up 20 per cent and olive oil 20-30 per cent higher. But the group has put up its own prices and implemented cost savings under a sterling 750m programme this year, sterling 400m of which has already been achieved.

The chief executive, Patrick Cescau, declared: "I am satisfied we have completed the first phase of restoring our competitiveness, and now we are looking to grow ahead of our markets with sustainable margin improvement."He denied that Unilever's new targets of 3 to 5 per cent sales growth and an operating margin of 15 per cent by 2010 were "timid" compared with the company's failed "path to growth" strategy, which called for 5 to 6 per cent growth and 16 per cent margins by 2004. "In the end we had zero growth," Mr Cescau said. "It's more important to me that we deliver what we said."

Unilever's European business posted underlying growth of 1 per cent in the three months to June, driven by a strong performance from the Netherlands, while the UK and Italy saw "modest" growth; sales were still down in Franceand Germany.

Ice cream sales failed to capitalise on the heatwave that swept across the continent and were behind last year.

Unilever still has a long way to go to catch up with its two bigger rivals, Procter & Gamble and Nestle, which have reported sales growth at around twice Unilever's rate.

"There is not enough in these results, we believe, to suggest that there is a brave new dawn at Unilever," said Charlie Mills at Credit Suisse.

Unilever has earmarked the bulk of its advertising spend for promoting personal care products and strengthening its presence in Asia, Africa and the US. Its main focus is on healthier products like the AdeZ soya-based fruit drink range, which has just been launched in the UK.