Kimberly-Clark Sees a Prolonged Period of Sluggish Growth Ahead

Kimberly-Clark (KMB 5.51%) just closed the books on a fiscal year that management is no doubt glad to put behind it. Sales growth slowed to a crawl and profitability worsened due to rising commodity costs, tough competition, and unfavorable currency exchange rate moves. There were some bright spots toward the end of fiscal 2018 that showed the power of its consumer products business. However, executives aren't expecting trends to improve much over the next several years.

More on that medium-term outlook in a moment. First, here's a look at Kimberly-Clark's big-picture results for the fourth quarter:

Data source: Kimberly-Clark's financial filings. YOY = year over year.

What happened this quarter?

After accounting for currency swings, sales returned to positive territory even as Kimberly-Clark raised prices across most of its portfolio of paper products, diapers, and other staples. Yet the company's results still trailed rival Procter & Gamble and implied the management team has plenty of work ahead to achieve sustainable market-share growth.

Image source: Getty Images.

Highlights of the quarter include:

• Organic sales rose 3% to mark the second straight quarter of improving sales trends. However, that expansion pace isn't as strong as it might seem at a glance. Procter & Gamble grew sales by 4%, after all, and Kimberly-Clark was going up against a prior-year period of negative growth.
• Looking deeper into the sales figure, higher pricing accounted for essentially all of the gains, which is a mixed result. Ideally, the company would have expanded prices and sales volumes, as P&G did.
• Gross profit margin fell as price boosts failed to offset spiking costs for commodities including paper, plastics, and oil.
• Selling expenses ticked higher, too, so operating profit fell to $639 million, or 14% of sales, from $828 million, or 18% of sales, a year ago.
• Lower tax expenses weren't enough to offset the losses in gross and operating profitability, leading to a 33% decline in earnings.

What management had to say

CEO Mike Hsu, in his first quarterly report since taking over the top spot in early January, described a difficult selling environment for the quarter and the year. "It was a challenging macro environment and our margins declined," Hsu said in a press release. Yet Kimberly-Clark notched some wins. "We returned to delivering organic sales growth," Hsu explained, "and we continue to launch innovations, pursue our growth priorities and invest in our brands."

Looking forward

Executives say they expect fiscal 2019 to remain challenging but reflect an improvement over last year's tough circumstances. Specifically, Kimberly-Clark is calling for organic sales to rise by 2% as sales volumes drift lower. That would constitute modest acceleration over last year's 1% uptick but translate into market-share losses to peers like P&G. The company believes profitability will fall again in 2019, but not as dramatically as it did last year.

Looking further out, management issued a medium-term forecast that shows growth challenges continuing on for years. The company aims to mainly protect -- not expand -- market share, with organic sales expected to rise between 1% and 3% annually from 2019 to 2022. Earnings should grow just a bit faster, thanks mainly to aggressive cost-cutting.

Kimberly-Clark executives sought to assure investors that they are optimistic about the company's long-run potential and its ability to return lots of cash to shareholders. However, investors are likely more concerned about the prospect for several additional years of weak market-share results.

Check out the latest Kimberly-Clark earnings call transcript.