This has been a tough year for consumer products companies. The industry is plugging along at near zero growth, which isn't much of a change from recent trends. However, Kimberly Clark (KMB 5.51%) and its peers are facing new challenges around rising commodity costs. And it's much harder to pass along higher expenses to your customers when demand is light -- and when rivals are keeping their prices low.
Kimberly Clark's ability to strike that balance between protecting market share and raising prices should help determine whether the owner of global franchises like Huggies diapers and Kleenex tissues meets its growth goals for 2018. Investors will get an important update on that battle when the company reports its third-quarter results on Oct. 22.
Growth pace
Organic sales, which measure Kimberly Clark's core growth pace, were flat last quarter. While that represented a slowdown from the prior quarter's 2% increase, the expansion rate met management's forecasts. Looking a bit deeper into the growth figure, sales rose in international markets, but these gains were offset by declines in the U.S. segment.
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That dynamic helps explain why Kimberly Clark, with its bigger focus on the U.S. market, has been growing more slowly than rival Procter & Gamble (PG 0.60%) lately. P&G posted a 2% organic sales uptick for the comparable period. Kimberly Clark executives have been forecasting a 1% sales uptick for the full year, but the company might update that outlook based on how well demand held up through the most recent selling period.
Price tests
After holding down prices during most of this latest industry slump, Kimberly Clark changed its strategy in a big way this past quarter. In August, the company announced significant hikes in the mid- to high-single-digit percentage range across its portfolio, including in the Kleenex, Huggies, and Cottonelle franchises. The move was "necessary to help offset significant commodity cost inflation," management said in a press release.
In this earnings report, investors will get their first look at how operating trends changed in response to these price increases. The good news is that the higher prices should support faster sales growth and increased profitability. However, those improvements must be balanced against reduced sales volumes that would reflect falling market share. That's why it will be important to look beyond Kimberly Clark's broader organic growth metric this quarter to follow both prices and sales volumes. Procter & Gamble raised its prices in the period, too, so the pressure on consumers to switch to competing brands was likely minimal.
The broader outlook
As part of the earnings report, Falk and his team will update their 2018 sales and profit outlooks to incorporate all the latest trends. If they affirm their revenue prediction, the company will be on track to post a 1% increase this year to mark a small improvement over the prior year's flat result.
Investors will be watching for changes to the profit forecast, too. Executives lowered that outlook last quarter while promising to take aggressive steps aimed at returning to robust earnings gains. If the profit picture worsens again, there will be more pressure on the consumer products giant to slash costs, shake up its portfolio, or make other moves that might snap it out of the weak trajectory the business has been stuck in over the last few years.
