Kimberly-Clark Plans Bulkier But Fewer Tissues Per Box To Fatten Margins

In its Q2 2013 earnings call, Kimberly-Clark (NYSE:KMB) announced plans to make certain innovations and improvements in its tissues division in the second half of the year. For this reason, consumers are now seeing changes across the company’s Kleenex line of products, including facial and bathroom tissues. For example, the company has started making Kleenex tissue papers bulkier than before in order to offer better quality. The improvement in Kleenex tissues is likely to keep customers using Kleenex tissues and could also enhance EBITDA margins for the company’s consumer tissue segment.

Tissues form an important division in Kimberly-Clark’s overall portfolio. The company derives slightly less than 50% of its revenues from tissue brands such as Kleenex and Scott. The tissue division consists of two segments: Consumer (at-home) and Professional (away from home). While under the consumer tissue segment only paper based products are sold, under the professional tissue segment additional products such as apparel, wipers, soaps and sanitizers are also sold.

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Desheeting Could Improve Consumer Tissue EBITDA Margins

Although Kimberly-Clark has made Kleenex tissues 15% bulkier, it has also reduced the number of tissues per box by 13% without changing the price of the box. According to Kimberly-Clark’s management, the desheeting exercise will benefit the company in the back half of the year. ^[1]  The consumer tissue segment has historically witnessed the lowest EBITDA margins among all divisions. Despite some improvement, the segment’s EBITDA margin stood better only than the health care division in 2012. The desheeting technique could help the consumer tissue segment enhance EBITDA margins as the management believes that making thicker sheets is a more efficient manufacturing method and won’t require additional materials. ^[1] An increase of even 1 to 2 percentage points in EBITDA margins could lead to an upside of 3%-5% in our price estimate for Kimberly-Clark’s stock.

In our view, the desheeting is also a good move by the company to effectively raise the price per tissue as a direct raise per box would have lead to consumers shifting to private labels, whose products are generally available at lower price points. Private labels are a threat to Kimberly-Clark as they have been gaining a lot of traction in recent times due to the price difference between branded and private label brands.

Our price estimate of $101 for Kimberly-Clark stands at a premium of about 5% to the current market price.

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1. Toilet-Tissue ‘Desheeting’ Shrinks Rolls, Plumps Margins, The Wall Street Journal, July 2013 [↩] [↩]