What To Expect From Kimberly-Clark’s Q3 and Fiscal 2018

by Trefis Team
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Kimberly-Clark (NYSE: KMB) scheduled to announce its fiscal third quarter results on Monday, October 22. The company reported mixed second quarter earnings, as its earnings per share came in ahead of market expectations, but revenue missed. The company’s results were impacted by a difficult environment, particularly significant commodity inflation. In Q2, the company’s net sales grew slightly to $4.6 billion, primarily due to flat organic sales, as a marginal decline in net selling prices and volumes was offset by a 1% year-over-year (y-o-y) increase in product mix. During Q2, the company saw gains in the Consumer Tissue and K-C Professional segments, which offset weakness in the Personal Care segment. In terms of bottom line, Kimberly-Clark’s adjusted earnings per share grew 7% y-o-y, driven by strong cost savings and reduced overhead spending.

Kimberly-Clark’s stock price has declined close to 10% over the course of 2018, due to falling prices and rising cost inflation. Our $108 price estimate for Kimberly-Clark’s stock is slightly below the current market price. We have created an interactive dashboard on Can Cost Savings Sustain Kimberly-Clark’s EPS Growth In Fiscal 2018? which outlines our forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation. We expect the company to continue to post an increase in earnings growth rate in Q3, driven by innovation-led new product launches, share repurchases, cost-saving measures, and lower effective tax rate. Below we outline certain key trends that we expect for the company in fiscal 2018 going forward.

Margin Pressure To Continue

Kimberly-Clark’s second quarter adjusted gross margin was 33.4%, down 270 basis points y-0-y. In addition, the company’s adjusted operating margin was down 100 basis points to 16.8%. 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 $675 million and $775 million compared with the previous guidance of $400-$550 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, Kimberly-Clark’s gross margin could reach a saturation point with only cost-saving initiatives supporting it.

Fiscal 2018 Outlook

For full-year 2018, Kimberly-Clark expects its net sales and organic sales to grow by 1% y-o-y. The company reduced its adjusted earnings outlook to $6.60 – $6.80 from a previous estimate of $6.90 – $7.20, due to significantly higher commodity costs and the recent weakening of many foreign currencies. Further, the company continues to implement sheet count reductions in North America and increase prices in Latin America. In addition, it also plans to raise prices in other international markets in its Consumer Tissues and K-C Professional business in 2018.

We expect Kimberly-Clark’s personal care segment to drive revenue growth in 2018, as it 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 Depends underwear, which could increase its market share in the global baby and feminine care market going forward. This segment is responsible for half of the company’s total sales.

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