Because it sells a diverse mix of consumer staples, Kimberly-Clark (KMB 0.63%) rarely struggles to produce steady earnings growth. Operating profit ticked higher in each of the last two years, and management recently confirmed its outlook that calls for another boost in 2017.
Sales growth is another story, though. Kimberly-Clark's expansion pace is weak and getting weaker. And if management doesn't find a way to speed it back up, the revenue slump will eventually pinch earnings and send total shareholder returns lower.
A gathering problem
Organic sales improved at a solid 5% clip in 2015 as the company executed well at marketing its core Kleenex, Huggies, and Cottonelle franchises in both developed and developing economies.
There's been a steady deceleration in the business since then. Management started the year optimistic that they would achieve 4% sales growth despite the weak selling environment. That outlook slipped to 3% in the second quarter and then declined again to 2% in the third quarter.
By the time Kimberly-Clark closed the books on the 2016 fiscal year, comps were stuck at that 2% rate, with management stressing the fact that its competitive position held steady overall. "While we experienced a challenging economic and competitive environment in 2016," CEO Thomas Falk said in late January, "our market share positions remained broadly healthy."
Still, many of its peers are posting stronger growth. Procter & Gamble, whose Pampers brand competes against Kimberly-Clark's Huggies, has seen its organic sales growth pace speed up to a 2% rate this year from 1% last year. Unilever expanded at a 3% rate last quarter and is targeting 4% for the full year.
These performance gaps could help explain why Kimberly-Clark's management didn't highlight its market share position in its latest quarterly report, choosing instead to stress progress on the financial side of the business as it lowered its outlook slightly to 1.5% at the midpoint of guidance from its initial 2% target.
Kimberly-Clark's collection of premium brands should protect it from price-based competition. However, that pricing power isn't showing up in the latest results. In fact, pricing fell by over 1% last quarter to completely offset a small uptick in volume. For the full year, the company expects prices to be flat or decline slightly. Contrast that outlook with Unilever and P&G, which both believe they'll improve their overall prices in 2017.
The profit impact
The good news for investors is that Kimberly-Clark has room to catch up with peers in terms of cost cuts, with the efficiency gains set to protecting earnings in the short term. Operating profit in its tissue segment, for example, held steady last quarter thanks mainly to a 10% lift that came from cost savings that almost completely offset 7% declines in both volume and average prices.
Overall, Kimberly-Clark is expecting to cleave at least $400 million out of its expense infrastructure this year, and that's the main reason why executives are confident they'll hit their earnings target of between $6.20 per share and $6.35 per share, representing 5% growth at the midpoint of guidance.
Without a rebound on the top line, though, shareholders can't count on a steady profit improvement in the coming years. And so far, Kimberly-Clark hasn't demonstrated, either through rising sales volumes or firming prices, that it has the power to spark that rebound.