What Is Kimberly-Clark’s Outlook For 2019?

by Trefis Team
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Kimberly-Clark‘s (NYSE: KMB) stock price dropped slightly after it reported its fourth quarter results, as revenues came ahead of market expectations but earnings per share missed. In Q4, the company’s net sales declined marginally 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 3% y-o-y, as a 3% improvement in net selling prices was offset by a 4% decline due to currency effects. During Q4, the company saw gains in the K-C Professional segment, 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 slightly, driven by cost savings and reduced overhead spending.

Kimberly-Clark’s stock price declined slightly over the course of 2018, due to falling prices and rising cost inflation. Our $107 price estimate for Kimberly-Clark’s stock is slightly below the current market price. We have created an interactive dashboard on What To Expect From Kimberly-Clark’s Q1, which outlines our forecasts for the company’s Q1 and full-year fiscal 2019 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation. In Q1, we expect Kimberly-Clark’s revenues to decline slightly on the back of continued declines in the Personal Care segment. In addition, commodity costs, foreign exchange challenges, and transportation costs could likely persist in Q1, which could impact the company’s growth rates.

What To Expect In Fiscal 2019 

For full-year 2019, Kimberly-Clark expects its total sales to decline 1% to 2%, including an expected 3% to 4% headwind from currencies. In addition, the company also plans to grow its organic sales by 2% and achieve a higher net selling price of at least 3% in the same period. Further, the company also plans to grow adjusted operating profit by 1% to 4% in fiscal 2019, of which commodities and currencies in total could be a headwind to operating profit of about 20%. All in all, Kimberly-Clark is targeting full-year adjusted earnings per share of $6.50 to $6.70 and diluted earnings per share of $4.85 to $5.35. Overall, we expect the environment to remain challenging for the company in 2019, although better than in 2018.

Margin Pressure To Continue

Kimberly-Clark’s full-year gross margin was 33.2%, down 270 basis points y-o-y. The primary reason for this decline was higher pulp and raw material cost and inflation – commodities were a drag of $795 million for the year. 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 commodity inflation to fall in the range of $300 million to $400 million in 2019. In addition, some big-box retailers’ aggressive pushes towards launching their own private-label products could impact Kimberly-Clark’s shelf space, which could also put pressure on margins.

Growth In Cost Savings Program

In 2018, Kimberly-Clark achieved $510 million of cost savings, which include its FORCE and Restructuring program savings. The company had announced its restructuring program as part of a multi-year cost savings target, whereby it set a four-year cost savings target of more than $1.5 billion. These savings are to be achieved 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. For 2019, the company is targeting to deliver $400 million to $450 million of total cost savings. This includes FORCE savings of $300 million to $325 million and restructuring savings of $100 million to $125 million. In addition, supply chain related restructuring activities and savings are also expected to ramp up in 2019.

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 2018, Kimberly-Clark’s organic sales grew 2% 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 grapples with weak pricing and market saturation 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 Kimberly-Clark’s long-term growth.

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