Where Is Kimberly-Clark’s Growth Going To Come From?

by Trefis Team
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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. However, we forecast the company’s total revenue to return to growth in 2018 and grow thereafter to reach nearly $21 billion in 2020, up from an $18.3 billion forecast for 2017. Below we discuss why we expect the company to turn things around despite some near-term headwinds, which are discussed in this note.

Personal Care Division: Important Growth Driver

Kimberly-Clark’s personal care segment is responsible for half of the company’s sales. This segment is home to a wide variety of products such as disposable diapers, youth pants, swim pants, baby wipes and feminine care products, sold under brand names such as Huggies, Pull-Ups, GoodNites, Kotex and Depend, to name a few. In fact, Kimberly-Clark gets a lot of value from its prime positioning in the baby care market, where its biggest franchise – Huggies – generated 56% ($1.8 Billion) of the total operating profit in 2016.

Kimberly-Clark’s personal care segment has been successful in maintaining its market share in Eastern Europe and China, primarily as a result of price cuts. However, the segment’s saw volume declines in North America, due to higher competitive activity and lower category demand. Going forward, the company plans to launch new innovations in Huggies Snug and Dry diapers, Goodnites Youth Pants and Depend underwear, which could increase its market share in the global baby and feminine care market going forward. Kimberly-Clark accounts for 14% of the U.S. market in the personal care segment (as of 2016).

Growth Outside North American Market

In the first six months of fiscal 2017, Kimberly-Clark’s net sales in markets outside North America grew 2% year-over-year (y-o-y), as compared to a 2% y-o-y decline in the North American market. Additionally, emerging markets remained an area of strength for the company, which registered 2% y-o-y organic sales growth in Q2 2017 (compared to a 1% decline overall). The company is looking at developing and emerging markets to drive growth, as it struggles to grow revenues in the North American market. The company has strong growth prospects in markets such as China and Brazil, primarily due to low penetration of its category products in these regions, and the likely increase in the consumption of these products with economic development. We expect this to be a key driver for the company’s long-term growth.

Cost Saving Initiatives

Kimberly Clark’s diluted EPS has grown from $3.99 in 2011 to $5.99 in 2016, despite the company’s revenue plummeting by over $1 billion during this period. In fact, a similar trend has been observed this year as well, so far. The company has been able to sustain its EPS growth due to its successful cost-saving initiative, dubbed FORCE (Focused on Reducing Costs Everywhere). In 2016 alone, the company saved $450 million under its FORCE initiative, which exceeded its own guidance of $400 million, and led to a 70 basis point increase in its gross margin. Going forward, the company plans to deliver $425 million to $450 million of cost savings in this fiscal year. This initiative has led to significant margin expansion for the company, and we expect it to bank on the continued benefits of cost savings in the near term as well.

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