The Challenges Facing Kimberly-Clark In the Near Term

Kimberly-Clark (NYSE:KMB) has struggled to generate meaningful revenue growth of late, with revenue declining in 2016, and the company cutting its guidance for 2017 following mixed fiscal Q2 earnings. In Q2 2017, the company’s net sales declined 1% year-over-year (y-o-y) to $4.6 billion, primarily due to lower organic sales, which reflected a challenging growth environment. The company’s organic sales also fell 1% y-o-y amid intense competition and low volume growth from developed markets. In fact, the company had a mixed fiscal first half overall, with flat revenue growth and a 4% y-o-y decline in diluted earnings per share. Additionally, the company generated $1.6 billion of net income from its revenue base of $9 billion in this period, from just a few of its most popular brands – Huggies, Kotex, and Kleenex.

Below we underline certain challenges facing the company in the near term.

Stiff Competition, Low Demand in The North American Market

Kimberly-Clark is heavily reliant on the North American market, which accounted for 52% of sales and 70% of profits in 2016. However, the company has been seeing some category softness, lower promotional shipments, and higher competitive activity in this geography from established players like Procter & Gamble (NYSE: PG). We believe that the increasing level of competition in this already saturated market could push the prices lower in the near term. Meanwhile, Kimberly-Clark will need to rely on a strong product portfolio to succeed in the developed markets, in addition to lower prices, particularly in the Baby Diapers and Feminine Care segments. Kimberly Clark has lost nearly 3 percentage points of share in both these markets since 2010, per our estimates, largely due to competition from the likes of P&G.

In Q2 2017, Kimberly-Clark’s North American organic sales fell 2% y-o-y, primarily due to a sluggish recovery in U.S. spending accompanied by weak demand. The Absolute Consumer Demand Index of America has been falling since September of last year, and its effects have started to weigh on the results of consumer companies.

Decline In Consumer Tissues Segment

Kimberly-Clark’s consumer tissue sales have been relatively weak of late. The tissue business is one of the company’s most valuable segments, accounting for over 30% of the company’s value, per our estimates. The segment witnessed a 2% y-o-y decline in organic sales in the first half of 2017, along with a 1% y-o-y decline in volume growth, driven by lower net sales and higher pulp costs. We expect this trend to continue in the remainder of fiscal 2017 as well, since pulp costs are expected to increase further.

See our complete analysis for Kimberly-Clark here

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