Kimberly-Clark Holds Its Own Amidst Rising Competition, Posts Strong Volume Gains in Q3

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Kimberly-Clark

Kimberly-Clark (NYSE:KMB) posted solid volume growth in third quarter results recently released. [1] The company’s focus on innovation and efficient pricing strategy paid off and helped it achieve 5% year on year volume expansion in the third quarter. Kimberly-Clark’s strong results come at a time when its rivals are hard pushed to achieve low single-digit growth. The 120 basis points year on year improvement in its non-GAAP gross margin further underscores the strength of Kimberly-Clark’s underlying business, even in the face of an adverse macroeconomic environment. We believe that the company’s fundamentals continue to remain strong and organic revenue growth is likely to remain consistent in the coming quarters. (Read: Here’s Why Kimberly-Clark’s High PE Ratio is Justified)

Snapshot of Kimberly-Clark’s third quarter performance:

  • Revenues declined by 7% year on year to $4.7 billion, including a 12 percentage points impact of currency headwinds
  • Non-GAAP operating margin improved by 10 basis points year on year, to 17.5%
  • Non-GAAP EPS was $1.51, an increase of $0.01 compared to the prior year period
  • Fiscal 2015 organic revenue growth guidance revised to 4% to 5%, compared to the original guidance of 3% to 5%

Our price estimate of $118 for Kimberly-Clark is slightly lower than its current market price.

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See our complete analysis for Kimberly-Clark here

Volumes Benefitted From Flat Prices and Innovation

Kimberly-Clark’s revenues contracted across the board in GAAP terms due to the 12 percentage points drag exerted by currency movements. However, it achieved commendable organic revenue growth despite challenging conditions in most emerging markets. That the company achieved this growth without increasing prices in any of its three divisions is even more remarkable. In fact, prices contracted slightly in the Consumer Tissue division. This is in stark contrast to Procter & Gamble (NYSE:PG), which has been raising prices quarter after quarter and is losing out on volumes. (Read: Focus on Completing Brand Divestments and Protecting Margins to Weigh on P&G’s Q1 Results)

Kimberly-Clark was able to avoid upticks in pricing because of its robust cost savings program and decreases in commodity prices. The company is passing on the benefits received from these factors to the consumers by holding back on price hikes. Consequently, prices were raised only in certain emerging markets with a high degree of currency volatility, like Latin America. [2]

Separately, Kimberly-Clark’s focus on innovation has allowed it to regularly release new products that cater to the needs of its customers. Its innovation in baby care and feminine care has helped it combat rising competition from Procter & Gamble in these segments. The company may also be benefitting from consumers switching away from P&G’s products due to its higher pricing.

FORCE Program and Input Cost Deflation Helped The Bottom-Line

As in the previous quarters, the FORCE (Focused On Reducing Costs Everywhere) program continued to yield significant cost savings. The program yielded $85 million in savings in the third quarter, which is slightly lower than the previous quarters but still on track with the company’s full year target. The organizational restructuring program and commodity cost deflation provided savings of $65 million in the quarter. [2] Kimberly-Clark partly reinvested these savings into innovation and brand building efforts, so the full benefit of the programs did not trickle down to the bottom-line.

Even then, Kimberly-Clark’s non-GAAP operating margin expanded by 10 basis points year on year in the third quarter. However, currency headwinds continue to have a substantial impact on the top-line as well as bottom-line and the trend is expected to continue in the following quarters. For the full year 2015, currency headwinds may have a negative impact of as much as 25% on the bottom-line. Nevertheless, we believe that the company is on the right track and is efficiently managing price hikes, volume growth, and margin accretion.

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Notes:
  1. Kimberly-Clark Investor Relation []
  2. Kimberly-Clark Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, October 21, 2015 [] []