Kimberly-Clark (NYSE:KMB) has a relatively stable business thanks to its deep portfolio of consumer brands like Kleenex tissues and Huggies diapers that millions of people use on a daily basis. But that doesn't mean the company can't occasionally surprise investors with shifts in its operating trends and changes in the market outlook.
With that in mind, here are three important things from this past week's quarterly report that shareholders likely didn't see coming.
A drop in prices
The company posted a 1% decline in organic sales, continuing a disappointing trend around revenue gains. Its expansion pace was a healthy 5% for the 2015 fiscal year, before slowing to a 2% pace last year and falling again to a slightly negative rate to kick off fiscal 2017.
The biggest factor in this latest slump was lower prices. Kimberly-Clark reduced net selling prices by more than a full percentage point, which wiped out the gains produced by the minor uptick in sales volumes.
Management blamed spiking competition in the U.S. market for the shift. Organic sales dove by 3% in that segment, "reflecting category softness, competitive activity, and less promotion shipments," executives explained.
Rival Unilever (NYSE:UL) fared better by posting a 1% organic sales drop in the U.S. geography as it gained share despite a shrinking overall industry. Kimberly-Clark, in contrast, couldn't claim market-share gains and instead had to settle for rising profits. "We delivered earnings growth despite a challenging environment, particularly in North America," CEO Thomas Falk said in a press release.
Costs and currencies
Currency exchange rates changes have swung from a having a heavy weight on results to giving a slight boost. In fact, currency shifts increased reported sales by 1% this quarter, after having caused a 4% reduction last year and a whopping 11% hit in 2015.
As a result, management now sees foreign exchange moves having zero effect on sales or profits this year, compared to its prior forecast of a 2% decline in both. However, that surprising gain is being completely offset by rising commodity costs. Kimberly-Clark has seen a few core inputs spike, and so cost inflation is projected to be about $200 million in 2017 compared to a prior estimate of $125 million.
There's no bottom-line effect on earnings between these two trends, which is why the company still projects 2017 profits will weigh in at between $6.20 per share and $6.35 per share, up roughly 5% from the $5.99 per share it posted last year.
Kimberly-Clark doesn't see the weak conditions in the U.S. market improving any time soon. Falk and his team now project overall organic gains coming in at 1.5% at the midpoint of guidance, which is a slight downgrade from their prior forecast of 2%. By comparison, Unilever expects to grow by 4%.
If the company doesn't outperform the latest target, 2017 will mark the second straight year that Kimberly-Clark has endured slowing sales growth, with organic revenue gains slumping from 5% to less than 2% since 2015.
Executives are ramping up their cost-cutting plans and will likely consider aggressive portfolio improvements to get sales growth back on track -- just as rivals have done in recent years. Unilever, for example, is divesting its spreads business and adding new product lines like Dollar Shave Club. Procter & Gamble just finished a huge portfolio reboot that saw it remove 100 brands from the portfolio to concentrate on just the fastest-growing, highest-margin franchises.
Initiatives like these might be needed as part of a bigger plan by Kimberly-Clark to improve its competitive position in the market now that it is losing share to global rivals as they step up their promotions and innovation strategies.
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