Predictability is a big reason why investors are attracted to Kimberly-Clark (KMB 0.49%) stock. Demand for consumer product essentials like Kleenex tissue paper and Huggies diapers doesn't swing wildly in response to shifts in the global economy, and so sales tend to march higher at a pace that's just above that of the broader industry.
Kimberly-Clark's premium branding position -- and its efficient business-- combine to turn those revenue gains into market-beating profit growth that then funds direct cash returns through dividends and stock repurchases. It's a powerful operating approach -- when it works. But, as its most recent fiscal year demonstrated, it doesn't always deliver for investors.
Starting weak and getting weaker
Kimberly-Clark executives were cautious at the start of the year. In late January, rather than forecasting a rebound toward 2015's impressive 5% organic sales increase, CEO Thomas Falk and his team predicted that their growth pace would hold steady at the 2% rate they had managed in 2016. This outlook put the company right on par with Procter & Gamble's (PG 0.29%) expansion pace but behind several other consumer goods peers, including Unilever (UL -0.12%) and Clorox.
That's when things started deteriorating for Kimberly-Clark. Its first-quarter results missed management's expectations, mainly thanks to sluggish growth and increased competition in the U.S. market. In response, the company lowered its growth outlook to 1.5%. Procter & Gamble, meanwhile, lifted its forecast to 2.5%, while Unilever confirmed its forecast.
Kimberly-Clark executives stayed optimistic that industry growth would pick up toward the second half of the year with help from product launches planned in the Kleenex, Huggies, and Kotex franchises. Instead, sales growth kept on slowing down. Organic sales dropped 1% in the second quarter and were flat in the third quarter. Both periods were impacted by what Falk called a "challenging environment" for branded consumer products, particularly in developed markets like the U.S. and Western Europe.
Peers including Procter & Gamble and Clorox used the same language in their quarterly updates, but their market positions held up better. P&G is on pace for a 2% increase and Clorox boosted sales by 4% in the fiscal year that just closed. Kimberly-Clark, on the other hand, now believes organic growth will come in flat to mark its second straight year of deceleration.
It wasn't all bad news in 2017, though. Kimberly-Clark beat its cost-cutting targets, which helped it overcome rising raw material prices to post higher profitability. Its 18% margin isn't far from industry leader P&G, in fact.
That financial success means investors can expect a slight profit increase for the year (about 3%) even as sales come in flat. Kimberly-Clark is in no danger of a pause or cut to the dividend, either.
Still, executives should be feeling pressure to announce more aggressive financial and operating moves when they close out their fiscal year in the coming weeks. To avoid a third straight year of slowing growth, they might consider divesting a few underperforming brands, a strategy that has worked well for P&G so far.
Kimberly-Clark could also look at deploying some of its capital toward acquiring new franchises, as Unilever has. These brands would bulk up its presence in faster-growing emerging markets as a hedge against further weakness in the U.S. segment. In any case, shareholders are likely to demand at least a plan that targets a modest growth rebound when the company officially closes the books on fiscal 2017.