Global-branded consumer-products companies find themselves in a tough operating environment today, characterized by rising costs and intense competition as they fight to protect market share in a flat industry. Kimberly Clark (NYSE:KMB) investors have seen the negative impact of those trends in the form of sluggish sales gains and falling profitability over the last two years.

That big-picture story didn't improve in the most recent quarter, which paired a weak market-share performance with reduced operating profits. Kimberly Clark also lowered its 2018 earnings outlook to account for a sharp increase in raw material costs that it has been unable to pass along to customers.

More on that full-year outlook in a moment. First, here's how the latest results stacked up against the prior-year period:

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$4.6 billion

$4.58 billion

1%

Net income

$465 million

$540 million

(14%)

Earnings per share

$1.30

$1.50

(13%)

Data source: Kimberly Clark's financial filings.

What happened this quarter?

Sales growth met management's modest expectations, thanks exclusively to demand upticks in emerging markets. Kimberly Clark's earnings picture darkened, though, as costs for inputs like pulp shot higher.

A baby playing with rolls of toilet paper

Image source: Getty Images.

Highlights of the quarter include:

  • Organic sales were flat, representing a slowdown from the prior quarter's 2% uptick. That result kept Kimberly Clark on track to reach its modest growth goals for the year. The company struggled with continued weakness in its core U.S. market, where sales fell despite increased promotions.
  • Selling prices declined even as raw material costs increased. These headwinds more than offset benefits from cost cuts to send overall profitability lower. Adjusted for the company's global restructuring program, operating profit stopped at $774 million, or 16.8% of sales, compared to $814 million, or 17.8% of sales, a year ago.
  • Tax expenses fell 32%, but Kimberly Clark's bottom-line profit margin still fell as net income dropped by 14% to $455 million.

What management had to say

"Our second quarter results reflect a challenging environment, particularly with commodity inflation," CEO Thomas Falk said in a press release. "Nevertheless, we continue to manage our company with financial discipline, as we generated $150 million of cost savings, reduced discretionary spending, and returned approximately $575 million to shareholder through dividends and share repurchases."

Management said higher commodity costs, plus the weakening of many foreign currencies against the U.S. dollar, have made it harder to generate earnings growth. Thus, Kimberly Clark's focus is on managing costs and "evaluat[ing] further opportunities to increase net selling prices," executives said.

Looking forward

The good news is that Kimberly Clark affirmed its 2018 sales-growth outlook of 1%, which should still represent a tiny improvement over last year's flat result. Executives also see more room to cut costs, with the company's restructuring plan on pace to provide about double the initial savings forecast this year.

However, higher raw-material costs will more than offset those gains, the company warned. As a result, adjusted operating profit is set to decline by between 2% and 5%, compared to the prior goal of an increase between 2% and 3%. To achieve a rebound in that core metric, Kimberly Clark will need to find a way to raise its selling prices. But before that can happen, it needs to engineer a growth rebound that returns organic sales to near the 5% rate it managed back in 2015.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.