The branded consumer goods industry has been unusually weak this year. A soft selling environment is forcing global players to boost their innovation levels in hopes of sparking demand. Even so, many companies have found it necessary to cut prices to protect market share.
Kimberly-Clark's (KMB +0.58%) business has been hit particularly hard by the market slowdown, putting the owner of the blockbuster Huggies, Kleenex, and Kotex brands on pace to trail its peers in 2017.
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Volume and pricing stumbles
Kimberly-Clark's organic sales growth fell to a negative 1% pace in the first quarter of the year. By comparison, its expansion rate was a healthier but still underwhelming 2% in 2016, and a robust 5% as recently as 2015.
The biggest contributor to the growth collapse was the U.S. market, which saw organic sales dive by 3% last quarter. Executives blamed a soft overall industry that fell to a 0.5% expansion pace from 1.5% last year.
There isn't much that the company can do about broader market trends. But CEO Thomas Falk and his executive team also cited stepped-up competition from rivals like Procter & Gamble and Unilever (UL 0.72%) as hurting the company's sales pace. Both companies enjoyed stronger overall organic growth in the most recent quarter, with P&G's organic sales rising 1% and Unilever's improving by 3%.
Image source: Getty Images.
All three consumer goods giants are predicting a modest rebound toward the end of this calendar year. However, Kimberly-Clark is more exposed to the competitive U.S. market, and so its growth outlook trails that of its peers despite a healthy pipeline of innovative product releases.
Kimberly-Clark is also falling short of its goal of boosting selling prices this year. Overall, prices fell by more than 1% last quarter to completely offset the uptick in sales volumes. Rivals are faring a bit better on this score, too; P&G's prices are flat over the last nine months, and Unilever's prices rose by a healthy 3% last quarter.
The good news for investors is that profitability is still rising despite these pricing pressures. Thanks to cost cuts and improving foreign exchange trends, Kimberly-Clark enjoyed a boost in both its gross and operating margins last quarter. Operating margin passed 18% as the company sliced over $100 million out of its expense infrastructure.
Looking toward 2018
Kimberly-Clark aims to remove at least $400 million of costs from its business over the full year, and that financial success will likely protect its profit goals. Earnings are still slated to rise by between 3% and 5% this year to as high as $6.35 per share.
Its market share stumbles will exact a price on growth, though. Executives in April lowered their organic sales outlook to 1.5% at the midpoint of guidance compared to their prior target of 2%. That result would put Kimberly-Clark behind P&G for the first time in years.
Investors are hoping to see evidence of a rebound in organic growth and pricing when the company announces its second-quarter results in late July. But without a dramatic turnaround Kimberly-Clark will post its second straight year of decelerating sales gains.
That would add pressure on management to take bolder strategic steps in 2018, in addition to scaled-up marketing and innovation support for its biggest franchises. For example, Kimberly-Clark might consider divesting underperforming brands as P&G has done recently, or make a few aggressive growth acquisitions similar to Unilever's 2016 purchase of Dollar Shave Club.
