Kimberly-Clark’s Moderate Organic Growth Wiped Out by Currency Headwinds in Q4

Leading tissue products manufacturer Kimberly-Clark (NYSE:KMB) reported mixed results in fiscal 2015 fourth quarter earnings reported on January 25th. ^[1] The company held pricing nearly steady even in the face of worsening currency headwinds, unlike its bigger rivals like Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL). This pricing strategy, which we have previously lauded in the past, allowed Kimberly-Clark to achieve commendable volume expansion in its Personal Care and Consumer Tissue businesses. However, the volume growth was obliterated by huge currency drags in the developing and emerging markets, leading to a decline of 6% year on year in as-reported fourth quarter revenue. On the plus side, Kimberly-Clark’s FORCE cost savings program continued to yield outsized benefits as in the first three quarters of the year, which helped prop up the bottom-line in currency neutral terms.

Kimberly-Clark’s fiscal 2016 fourth quarter performance snapshot:

• Net sales contracted by 6% year on year to $4.5 billion (5% growth in constant currency terms)
• Non-GAAP gross margin improved by 220 basis points year on year to 36%
• Non-GAAP operating margin improved by 123 basis points year on year to 17.2%
• Non-GAAP EPS was $0.91, compared to a loss of $0.22 per share in the prior year period

Our price estimate of $118 for Kimberly-Clark is about 5% lower than its current market price.

See our complete analysis for Kimberly-Clark here

Steady Pricing Despite Devastating Currency Headwinds Lifted Volumes

Kimberly-Clark continued its customer-friendly pricing strategy in the fourth quarter. Price hikes contributed a mere 1 percentage point in Personal Care’s organic revenue growth of 8% year on year. Prices in fact declined in the Consumer Tissue business, helping lift volume growth to 4% year on year. The K-C Professional (away-from-home tissue products) segment was the sole exception, with 2% pricing growth and a 2% contraction in volumes. Overall, pricing contributed only 1 percentage point to Kimberly-Clark’s company-wide organic revenue growth of 5% year on year in the fourth quarter.

These figures are notable because Kimberly-Clark suffered currency headwinds of 9 percentage points in its Consumer Tissue and K-C Professional businesses. Despite this, the company chose to adjust its pricing downward in the Consumer Tissue segment to counter the growing competition in North America. ^[2] The currency drag was even worse at 12 percentage points in the Personal Care business and yet pricing growth was minimal at 1 percentage point. This has raised concerns of whether the company may be overplaying its hand in not following the price hike trend set by Procter & Gamble and Unilever.

However, we believe that the company is right in maintaining its prices and bearing the temporary brunt of adverse currency movements. The impact of volatile currency movements is expected to reduce to mid-single digits in fiscal 2016. ^[2] At that point Kimberly-Clark may be able to benefit from consumer stickiness resulting from having kept steady prices in the face of lower margins in the short term. Consequently, the company may well be able to gain market share in the hotly competitive Personal Care and Consumer Tissue markets.

Strong Margin Accretion From FORCE Cost Savings

Kimberly-Clark’s FORCE (Focused On Reducing Costs Everywhere) cost savings program continued to yield dividends in the fourth quarter also. It achieved $365 million in cost savings in the full year fiscal 2015, beating its target of $300 million. This helped the company achieve triple-digit accretion in its non-GAAP gross margin as well as non-GAAP operating margin. The benefits of the FORCE program are expected to be sustainable, since Kimberly-Clark expects to achieve another $350 million in cost savings from the program in fiscal 2016. ^[2]

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More Trefis Research

1. Kimberly-Clark Investor Relations [↩]
2. Kimberly-Clark Fiscal 2015 Fourth Quarter Earnings Call Transcript, Seeking Alpha, January 25, 2016 [↩] [↩] [↩]