Commodity Inflation Could Negatively Impact Kimberly-Clark In Q4

by Trefis Team
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Kimberly-Clark‘s (NYSE: KMB) adjusted earnings per share and revenues came in ahead of market expectations in its third quarter results. In Q3, the company’s net sales declined 2% y-o-y (year-over-year) to $4.6 billion, primarily due to a difficult environment – particularly significant commodity inflation and negative foreign currency effects. However, the company’s organic sales grew 1% y-o-y, as a 1% improvement in net selling prices and product mix was offset by a marginal decline in volumes. During Q3, the company saw gains in the K-C Professional segments, which was more than offset by weakness in the Personal Care and Customer Tissues segments. In terms of bottom line, Kimberly-Clark’s adjusted earnings per share grew 7% y-o-y, driven by strong cost savings, reduced overhead spending, and lower taxes.

Kimberly-Clark’s stock price has declined more than 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 ahead of the current market price. We have created an interactive dashboard on What To Expect From Kimberly-Clark’s Q4 and Fiscal 2018, which outlines our forecasts for the company’s Q4 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. In Q4, we expect the company’s revenues to decline slightly on the back of continued declines in the Customer Tissues segment. In addition, commodity costs, foreign exchange challenges, and transportation costs could likely persist in Q4, which could impact the company’s growth rates.

Below we outline certain key trends that we expect for the company in fiscal 2018 going forward. 

Margin Pressure To Continue

Kimberly-Clark’s third quarter adjusted gross margin was 33.2%, down 250 basis points y-0-y. In addition, the company’s adjusted operating margin was down 120 basis points to 17.4%. 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 going forward, as the company has guided for its full-year cost inflation to fall in the upper half of its previous outlook of $675 million to $775 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.

Growth In Cost Savings Program

In Q3, Kimberly-Clark achieved $105 million of FORCE cost savings and also delivered $40 million of cost savings from its restructuring program. The company had announced its restructuring program as part of a multi-year cost savings target, whereby it has set a four-year cost savings target of more than $1.5 billion. These savings will be planned by improving productivity at manufacturing facilities, optimizing raw material and product design costs, generating benefits from procurement activities and improving distribution efficiencies. Kimberly-Clark expects the program to generate annual pre-tax cost savings of $500 million to $550 million by the end of 2021 through workforce reductions in the range of 5000 to 5500, or about 12% to 13% of its total workforce. Additionally, this program is expected to broadly impact all of the company’s business segments and organizations in each major geography.

Growth In Emerging Markets 

Markets outside North America remain an area of strength for the company, as almost 48% of total sales are observed here. In Q3 2018, Kimberly-Clark’s organic sales grew 3% y-o-y in emerging markets, compared to 1% y-o-y growth in developed markets. The company is looking at developing and emerging markets to drive growth, as it struggles in the North American market due to weak pricing and market saturation. 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.

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 continues to expect its adjusted earnings in the $6.60 to $6.80 range, and diluted earnings in the range of $3.29 to $3.79. Furthermore, the company expects its adjusted operating profit to decline in fiscal 2018, mostly because of the recent weakness in many foreign currencies, especially in Latin America. In addition, 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 Depend 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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