Inflation Squeezes Margins At Kimberly-Clark

by Trefis Team
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Kimberly-Clark (NYSE:KMB) released its Q1 2011 earnings on April 25th. We previously discussed our concerns over rising input costs, but the magnitude of the dent to EBITDA margins was a bit higher than we had expected. [1] Kimberly-Clark’s competitors Procter & Gamble (NYSE:PG), Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL) will release earnings on April 28.

Given the latest earnings release, we have revised our price estimate for Kimberly-Clark stock to $65.78, about 5-10% above market price.

First Quarter Highlights

Kimberly-Clark’s grew first quarter sales by 4% over the same period in 2010, to $5 billion. While volume contributed around 2% to the growth, another 2% still came from favorable foreign exchange rates.

One concern was the corresponding 18% drop in operating income from $644 million in Q1 2010 to $544 million in Q1 2011. While Kimberly-Clark benefited from sales growth and dedicated cost savings of $60 million, these were far outpaced by inflation in key input costs of about $195 million over 2010 levels. Production curtailment to check inventory levels adversely affected operating income by an additional $25 million.

What to Expect for the Rest of 2011?

In March, Kimberly-Clark proposed price increases in North America in the range of 3%- 7% for baby care products and around 7% for consumer tissues to be implemented in the second and third quarters of the current fiscal year. [2] Given the Q1 results, the price increases are almost a certainty now. In fact, given the magnitude of cost-inflation we do not rule out the possibility of Kimberly-Clark implementing price hikes outside North America as well. While we don’t rule out higher costs outside North America, we think price-conscious consumers in emerging markets can still expect stable prices, at least over the next two quarters.

Given Kimberly-Clark’s vulnerability to pulp and paper, which are inputs for most of its products, it might also be wise for the company to explore further outsourcing options, particularly in geographies outside the U.S. This would keep a check on raw material costs and also reduce overheads associated with management and administrative expenses, which currently strain Kimberly-Clark’s operating margins.

See our complete analysis of Kimberly-Clark stock here

  1. Kimberly-Clark Earnings Preview: Watching Cost Pressures, Trefis, April 21’ 2011 []
  2. Price hikes Won’t Help Kimberly-Clark’s Stock, Trefis, April 25’ 2011 []
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