The coronavirus pandemic has upended the world in ways that were both unexpected and predictable. For example, given the early medical concern, few predicted a run on toilet paper. But, from day one, economics warned about the inflationary impact of keeping interest rates artificially low to stimulate the economy.
With so many issues swirling, Kimberly-Clark (KMB 1.28%) has been busy trying to cope. The giant paper goods company is only doing so-so in dealing with the headwinds.
The top line looked OK
When Kimberly-Clark reported full-year 2021 results, it was able to show a top-line sales gain of 2%. That's not too bad, but it's not the only number to look at. Notably, organic sales slumped 1%. The difference between these two numbers for a consumer staples company is very important. Basically, the company raised product prices enough to bolster the top line even though customers bought fewer of its goods.
Image source: Getty Images.
That's the big picture, but it gets even more complicated when you take a closer look at Kimberly-Clark's main divisions. For example, in personal care the company was able to achieve 6% organic growth via a combination of price hikes and volume gains. This division makes up around half of revenues, so that's pretty good news. Sales in the division grew 10% year over year in 2021. Personal care includes things like feminine hygiene products and diapers.
However, the rest of the company's business didn't fare nearly as well. For example, its professional business had flat organic growth, with higher prices offset by a decline in demand. This business is around 15% of revenues. That's a wash from a revenue standpoint, but the fact that business customers switched to cheaper alternatives for their paper needs could become a problem if it continues.
Harder to quantify is Kimberly-Clark's performance in consumer paper, which makes up the rest of sales. This was the division that saw a massive demand spike when people were hoarding paper goods early in the pandemic. The company didn't make any price changes here, but organic sales still plunged 11%. That totally offset the benefit from the larger personal care division and left overall organic sales down 1%.
The drop is most likely just a function of buyers working through their store of toilet paper, not an indication that consumers no longer like the company's Scott brand toilet paper. However, when customers will be through with this inventory adjustment is hard to tell.
And things get worse lower down
The top line is always important for consumer goods companies, but you can't ignore things further down the earnings statement. That's particularly important today because of inflation and the supply chain disruptions that are taking place, again largely thanks to the pandemic and the efforts to deal with it. Kimberly-Clark's adjusted earnings in 2021 were $6.18 per share, down 20% from the $7.74 it earned in 2020. That's not a great sign.
But, again, the math isn't so simple. Earnings in 2020 benefited from the windfall profits of selling huge amounts of paper products to stockpiling consumers. So the drop-off in 2021 was kind of expected. However, a big part of the issue was rising costs, given that sales were up slightly overall.
KMB Cost of Goods Sold (Annual) data by YCharts
To put a number on the issue, Kimberly-Clark noted in its earnings release that full-year results were impacted by $1.49 billion of higher input costs. Other manufacturing costs were also elevated. Given the rising cost of salaries, it seems unlikely that the elevated other manufacturing costs are going to head lower anytime soon. And the higher input costs are likely tied to commodity prices for the wood products that go into the company's paper goods.
That could go either way, and it's hard to handicap the direction, though higher (or at least still elevated) seems more likely than lower right now. There's little Kimberly Clark can do about these costs other than try to pass them on to consumers.
Passing costs through to end customers, however, isn't always easy -- note the impact on the professional business, and even without price hikes, demand was weak for the company's consumer paper goods. Raising prices into demand weakness like that is probably not the best call.
A mixed picture
At the end of the day, Kimberly-Clark's more differentiated products, where there's a chance to show notable benefits, appear to be holding up well. That these personal care brands make up half of sales is the good news from 2021.
That bad news is that the rest of the company's business is facing a far more uncertain operating environment, and the products aren't nearly as easy to separate from the pack. It looks like this consumer goods icon is muddling through as best it can right now, but not much more than that.
