Kimberly Clark’s Q1 Growth Driven By Cost Savings; Could Be Unsustainable Without Top Line Expansion

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Kimberly-Clark (NYSE:KMB) reported its Q1’17 earnings on Monday, April 24. The company’s organic sales fell 1% amid intense competition and low volumes from developed markets, especially North America, though its net sales remained flat year-on-year because of currency tailwinds of 2%. Emerging markets remained an area of strength for Kimberly Clark, registering 4% organic sales growth.

Keeping in line with recent trends, the company continued to outperform profitability expectations, with EPS exceeding analyst estimates by 2 cents per share. This was driven by cost savings of $110 million and restructuring benefits.

Although Kimberly Clark started fiscal 2017 on a solid note, there are two factors to be wary of going forward:

  1. Bottom line growth without top line expansion is unlikely to be sustainable for the long term.
  2. Lower prices are driving volume growth in the personal care segment.

kmb-Q1'17-earn-1

 

See our complete analysis for Kimberly-Clark here

Cost Savings Alone Cannot Sustain Earnings Growth

Kimberly Clark’s EPS has grown from 4.80 in 2011 to 6.03 in 2016 despite a fall of over $1 billion in the net sales during this period. This has been possible because of its successful cost saving initiative FORCE (focused on cost savings everywhere). Last year, the company saved $450 million under this initiative, exceeding the guidance of $400 million. A similar trend has been observed so far this year, where the EPS is growing, but the organic sales of all the three business segments, i.e. Personal care, Consumer Tissues, and KC Professional have failed to show any growth.  On top of this, the management has reduced the previous guidance of 2% organic growth to 1-2% for the full year 2017.

As there is likely to be a saturation point for the margin expansion through cost savings alone, the company can soon run into the periods of no earnings growth if it fails to improve its top line by competing on the innovations, marketing, and volumes front. It is worth noting that Kimberly Clark has raised its dividend by 5.4% in 2017 and this was the 45th consecutive year of raise. To continue with such dividend growth, it is vital that the earnings must follow a sustainable growth pattern.

kmb-Q1'17-earn-2

Is The Personal Care Price War Still On?

The fact that Kimberly Clark’s Personal Care segment had to undergo a 2% reduction in pricing in order to register a 2% increase in volumes indicates that the price war in the segment is still raging in developing markets such as China. Owing to the lower price points, the segment’s organic sales remained about flat despite the fact that it sold more units. This is not necessarily a negative in the short term, especially in developing markets, where pricing largely drives consumer purchasing patterns. However, to succeed in developed markets, Kimberly Clark will have to rely on innovation and a strong product portfolio rather than competing purely on pricing. In North America, Pampers & Luvs (by P&G) have an upper hand over Huggies, and the latter’s market share has fallen in the region, from over 43% in 2009 to 37% in 2014.

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