Leading personal care products company, Kimberly-Clark (NYSE:KMB) posted better than expected results in Q3 2013 with 5% y-o-y increase in organic sales (excludes the impact of changes in foreign currency exchange rates and lost sales due to restructuring), higher than 3% growth achieved in the first half of 2013. The remarkable improvement came on the back of 3% higher volumes, 1% higher net selling prices and 1% improved product mix. 
Net sales remained almost flat y-o-y at $5.26 billion, as lost sales associated with restructuring activities and unfavorable currency rates each reduced net sales by 2%. Despite disappointing revenue growth, Kimberly-Clark delivered 5% higher net income in the quarter on account of lower effective tax rate and marketing costs.  As a result, the manufacturer of popular brands like Huggies, Kotex and Scott stock has seen its stock price rise by 5% since its earnings announcement on Tuesday.
K-C International continued to lead the company’s growth in Q3 2013 like in previous quarters with 10% y-o-y increase in organic sales. The company achieved $70 million in cost savings from its FORCE (Focus On Reducing Costs Everywhere) program which helped it counter commodity and currency headwinds in international markets. The management remains upbeat about future FORCE savings.
Kimberly-Clark also witnessed improved top line performance in some of its high margin businesses, such as the North American Huggies Diapers business. Huggies diaper volumes were up 4% owing to effective marketing communications and competitive promotion activity, a trend which we expect to continue in the future.
K-C International Will Continue To Maintain Its Growth Trajectory
Kimberly-Clark’s portfolio in international markets is skewed towards diapers and feminine care. In Q3 2013, the company’s diaper volumes increased by 45% in China, 35% in Russia and 20% in Brazil.  The sale of baby care products is increasing at a fast rate in these countries due to factors such as a large population, stronger purchasing power and greater brand awareness among consumers.
Registering double-digit organic sales growth, the company’s baby wipes and adult care products have also been performing well; however, their penetration is lower than diapers and fem care products. This offers the company scope to further expand in baby wipes and adult care. We believe that these factors will help Kimberly-Clark to boost sales of personal care products in international markets.
Kimberly-Clark is improving mix and implementing price increases wherever possible. In its Q2 2013 earnings call, the company raised its forecast for full year 2013 FORCE savings from $250-$300 million to $300-$350 million. It is also confident about generating a healthy level of savings from the FORCE program in the years to come.  In our view, these forces will play in the company’s favor to offset the impact of rising commodity costs and currency weaknesses, thereby helping K-C International to maintain its growth momentum.
North American Business To Benefit From Downsizing Exercises
Kimberly-Clark recently made changes across its Kleenex and Cottonelle line of tissue products. It reduced the number of tissues per box by 13% without changing the price of the box, a technique popularly known as downsizing. The effective rise in price per sheet allowed the consumer tissue segment to register 4% y-o-y organic sales growth in North America despite a decline in volumes. For more insights on Kimberly-Clark’s tissue downsizing initiative, read our article: Kimberly-Clark Plans Bulkier But Fewer Tissues Per Box To Fatten Margins.
The company announced that it will conduct a similar exercise on the majority of its Huggies diapers business in North America in Q1 2014.  This will help the company in funding innovations and investing in promotional activity. Downsizing is also a good move by the company to effectively raise the price per unit as a direct raise would 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.
We are in the process of updating our $101 price estimate for Kimberly-Clark.Notes:
- Q3 2013 Results and 2013 Outlook, Kimberly-Clark Q3 2013 Earnings Presentation, October 22, 2013 [↩]
- Kimberly-Clark Announces Third Quarter 2013 Results, Kimberly-Clark Investor Relations, October 22, 2013 [↩]
- Kimberly-Clark’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 22, 2013 [↩] [↩]
- Kimberly-Clark’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 22, 2013 [↩]