Branded consumer staples companies are struggling to grow these days as the industry stagnates. Meanwhile, price cuts by the biggest global players and rising raw material costs have combined to add profitability challenges to the mix.
Kimberly-Clark's (KMB 0.77%) first-quarter earnings report this week showed that the company isn't immune to these problems. Yet the owner of the blockbuster Huggies diaper and Kleenex tissue franchises is doing its best to manage the business through the difficult selling environment.
Let's take a closer look at the results.
Kimberly-Clark earnings
| Metric |
Q1 2018 |
Q1 2017 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$4.7 billion |
$4.5 billion |
5% |
|
Net income |
$93 million |
$563 million |
(83%) |
|
EPS |
$0.26 |
$1.57 |
(83%) |
Data source: Kimberly-Clark's financial filings. EPS = earnings per share.
Staying on track
Its 5% revenue boost was primarily the result of foreign exchange moves. Yet organic sales improved 2% to mark the first time that this metric rose in almost a year.
The boost was powered by a return to growth in Kimberly-Clark's core U.S. market, which expanded at a 3% rate compared to a disappointing 3% decline last quarter. The company cut prices in major franchises including the Huggies diaper brand. But that strategy yielded higher sales volumes against rivals like Procter & Gamble and led to a decent uptick in overall sales.
Image source: Getty Images.
Restructuring charges combined with one-time tax expenses to take a huge bite out of Kimberly-Clark's earnings. After accounting for these temporary factors, adjusted earnings increased 9% to $1.71 per share. Cost cuts helped in this area, but they weren't enough to offset quickly rising raw material expenses, so profitability declined slightly.
Management's comments
CEO Thomas Falk focused his comments on the company's return to sales gains. "I'm encouraged by the 2% organic sales growth we delivered in the first quarter, led by improved performance in North America," Falk said in a press release. He went on to explain how their restructuring efforts are helping fund stronger cash returns. "We generated $90 million of cost savings, reduced discretionary spending and returned approximately $550 million to shareholders through dividends and share repurchases," Falk said.
As for the profit pinch, executives are confident that they can offset those raw material expenses. "While our margins were impacted by significant commodity inflation," Falk said, "we're taking actions to increase net realized revenue and reduce costs in order to improve performance."
Looking ahead
Management now sees cost inflation cleaving between $400 million and $550 million from 2018 earnings, up from their prior estimate of between $300 million and $400 million. However, thanks to savings from Kimberly-Clark's efficiency programs, adjusted earnings should still land between $6.90 per share and $7.20 per share, which translates into a gain of between 11% and 16%. Those improving finances will easily fund a dividend that most recently rose 3%.
Kimberly-Clark is still projecting organic sales growth of 1% this year. Hitting that target would mark a tiny improvement over last year's flat result but still represent minor market-share losses in a sluggish industry.
Management's hope is that the growth pace will speed up in future years as investments in product innovation and deeper expansion into key markets like China begin paying off. Their short-term forecast implies more pricing and volume challenges ahead at least through 2018, though.
