Kimberly-Clark Earnings Preview: Baby Care And Consumer Tissue Will Witness Margin Expansion

by Trefis Team
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Kimberly-Clark
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Kimberly-Clark (NYSE:KMB) is set to release its results for the first quarter of fiscal year 2014 on Monday, April 21. The manufacturer of Kleenex tissues registered organic sales growth of 4% in 2013, achieving the mid-point of its guidance. While all the other segments grew organic sales by 3% or more, health care organic sales increased by only 1% due to decelerating growth in the U.S.— the world’s largest market for disposable medical devices. Kimberly-Clark will be pursuing a tax-free spin-off of the health care division later this year. [1] According to Kimberly-Clark’s management, the spin-off could slow the rate of dividend increases in the short term. We think that the spin-off will create greater shareholder value in the long-term by allowing the company to further increase its focus on its core strength, the personal care business.

Despite healthy organic sales growth, net sales increased less than 1% to $21.2 billion in 2013, as the combined impact of unfavorable currency exchange rate movements and lost sales due to restructuring activities nullified the growth. On the positive front, operating profit rose by 19% to $3.2 billion, helped by $310 million cost savings from the ongoing FORCE (Focused On Reducing Costs Everywhere) program. FORCE aims at containing costs and keeping the company on track for sustainable growth. The company expects significant currency headwinds and higher commodity costs this year. Nevertheless, it expects to save at least $300 million from FORCE, which should help it overcome these problems. [2]

We have a price estimate of $112 for Kimberly-Clark’s stock, in line with its market price. We will update our model after the results are announced.

See our complete analysis of Kimberly-Clark here

Baby Care Segment To Witness Strong Growth This Year

In order to improve profitability and channelize resources toward stronger markets with better growth opportunities, Kimberly-Clark exited the Western and Central European diaper market (except Italy) last year. Exiting these markets allowed the company to divert resources towards China, Brazil and Russia, a few of the fastest growing diaper markets. In the second half of 2013, Kimberly-Clark’s diaper sales rose by more than 35% in China and by 20% in Brazil and Russia. [3] [4]

The penetration of baby care products is increasing at a fast rate in countries such as Brazil and China owing to a large population, an increase in purchasing power, persistent product innovation and greater brand awareness among consumers. Euromonitor expects the demand for diapers, nappies and pants in China to grow at a CAGR of over 15% on a volume basis between 2012 and 2017; the rate in Russia and Brazil should be near 5%. [5] [6] [7]

During its fourth quarter earnings call, Kimberly-Clark briefly laid out its plan for diapers for the current year. The company identified China as a key growth market and announced that it will expand into 10 more cities by the end of the year. It will launch new diaper innovations in Brazil, China and Russia, and also support these by increasing its advertising expenditures. We think that these factors put the company on track to deliver strong growth in baby care this year. [4]

Operating Margins To Expand Due To Cost Savings And De-sheeting Exercises

We think that Kimberly-Clark’s recent efforts to enhance the selling price per unit for tissues and diapers will provide an upward momentum to the margins. In mid-2013, the company carried out a de-sheeting exercise across its Kleenex and Cottonelle line of tissue products, reducing the number of tissues per box by 13% without changing the price of the box. [8] The effective rise in price per sheet boosted operating profits for consumer tissue (accounts for 31% of company net sales) by 17% year-on-year in Q4 2013, the highest for any business segment of the company. [4] Kimberly-Clark conducted a similar exercise across its Huggies diapers range and began shipping the new packages in February. We believe this will help the company to post margin expansion in baby care as well. Baby care products contribute about 25% to company net sales.

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Notes:
  1. Kimberly-Clark Form 10-K, www.sec.gov, 2013 []
  2. Kimberly-Clark Announces Year-End 2013 Results And 2014 Outlook, www.sec.gov, January 2014 []
  3. Kimberly-Clark’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 22, 2013 []
  4. Kimberly-Clark’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 24, 2014 [] [] []
  5. Nappies/Diapers/Pants in China, Euromonitor, July 2013 []
  6. Nappies/Diaper/Pants in Russia, Euromonitor, July 2013 []
  7. Nappies/Diapers/Pants in Brazil, Euromonitor, July 2013 []
  8. Toilet-Tissue ‘Desheeting’ Shrinks Rolls, Plumps Margins, The Wall Street Journal, July 2013 []
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