What To Expect From Kimberly-Clark’s Q2 Earnings

by Trefis Team
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Kimberly-Clark (NYSE:KMB) is scheduled to announce its fiscal second quarter results on Tuesday, July 24. In Q1, the company’s revenue came in about in line while earnings per share beat market expectations. The company’s net sales grew 5% year-over-year (y-o-y) to $4.7 billion, primarily due to 2% y-o-y increase in organic sales, as a 1% y-o-y decline in net selling prices was offset by a 3% y-o-y increase in volumes. Going forward, we expect the company to post an increase in sales and earnings growth rate, driven by innovation-led new product launches, share repurchases, cost-saving measures, and lower effective tax rate.

However, Kimberly-Clark’s stock price has declined over 10% year-to-date, due to falling prices and rising cost inflation. Our $108 price estimate for Kimberly-Clark’s stock is slightly ahead of the current market price. We have created an Interactive Dashboard for Kimberly-Clark which outlines our forecasts for the company’s Q2 and full-year fiscal 2018 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.


Margin Pressure To Continue

Kimberly-Clark’s first quarter adjusted growth margin was 33.8%, down 310 basis points y-0-y. The primary reason for this decline was higher pulp and raw material cost and inflation. We expect the continued cost pressure from inflation in raw materials and input costs to hurt the company’s margins, as the company has guided for full year cost inflation between $400 million and $550 million compared with the previous view of $300-$400 million. In addition, some big-box retailers’ aggressive push towards launching their own private-label products could impact Kimberly-Clark’s shelf space, which could again put pressure on its margins.

Kimberly-Clark’s adjusted EPS has grown from $4.80 in 2011 to around $6.2o in 2017, despite the company’s revenue falling by over $1 billion during this period. The company has been able to sustain its EPS growth largely due to its successful cost-saving initiatives. However, bottom line growth without a significant top-line expansion is unlikely to be sustainable in the long term. Going forward, its gross margin could reach a saturation point with only cost savings initiatives supporting it.

Growth Outside North America Could Drive Growth

Markets outside North America remain an area of strength for the company, as almost 48% of the company’s sales are observed here. In Q1 2018, Kimberly-Clark’s net sales in these markets grew 7% y-o-y, as compared to a 3% y-o-y growth in the North American market. The company is looking at developing and emerging markets to drive growth, as it struggles in the North American market due to weak pricing. 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 market to be a key driver for Kimberly-Clark’s long-term growth.

Future Outlook

For full-year 2018, Kimberly-Clark expects its net sales to range between 2% to 3%, compared to a previous 1% to 2% range. The company’s organic sales could grow around 1% y-o-y. It also expects its adjusted earnings per share to range between $6.90 to $7.20, up 11% to 16% y-o-y. The company also plans to include sheet count reductions in North America and increase prices in Latin America. In addition, it plans to raise prices in other international markets in its Consumer Tissues and K-C Professional business in 2018.

Kimberly-Clark’s personal care segment is responsible for half of the company’s total 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. 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. 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).

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