Kimberly-Clark Sees a Brighter Year Ahead

The consumer staples giant just raised its 2019 outlook after strong second-quarter results.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Jul 23, 2019 at 2:00PM
Consumer Goods

Investors had been gaining confidence in Kimberly-Clark's (NYSE:KMB) business through the first half of 2019. The consumer staples giant reported an encouraging uptick in growth to start the year thanks mainly to higher prices on products like diapers and tissue paper. Its chief rival, Procter & Gamble (NYSE:PG), meanwhile, raised its growth outlook in two successive quarters, which implied gathering demand momentum in the industry.

This week, Kimberly-Clark demonstrated that it is fully participating in that rebound. In a fiscal second-quarter earnings report, the company revealed faster sales gains and improving bottom-line profitability.

Here's a look at how the headline results stacked up against the prior-year period:

 Metric

Q2 2019

Q2 2018

Year-Over-Year Change

Revenue

$4.6 billion

$4.6 billion

N/A

Net income

$495 million

$465 million

6%

Earnings per share

$1.41

$1.30

8%

Data source: Kimberly-Clark's financial filings.

What happened this quarter?

Kimberly-Clark's organic sales growth accelerated by the widest margin in over a year as it passed along higher prices to consumers. Cost cuts and stock buyback spending helped per share earnings rise at an even faster rate, convincing management to raise its 2019 outlook.

A box of tissues on a gray surface.

Image source: Getty Images.

Highlights of the quarter include:

  • Reported sales were flat, but after accounting for currency exchange swings that core metric improved 5%. That marked Kimberly-Clark's fastest expansion rate in more than a year and showed a solid acceleration over the prior quarter's 2% uptick. Procter & Gamble, which reports its results in the coming days, has been growing at around the same 5% pace.
  • Sales trends weren't uniformly positive, as Kimberly-Clark again relied entirely on higher prices for the organic sales boost, with volumes ticking lower.
  • Gross profitability improved due to higher pricing and a slowdown in commodity cost growth.
  • The company ramped up marketing and advertising spending to support its brands, which pressured operating margin and kept that figure at 15% of sales compared to P&G's 21%. Yet Kimberly-Clark's lower tax expenses and falling stock of outstanding shares combined to push earnings higher by 8% per share.

What management had to say

Executives highlighted the company's broad-based rebound in the period. "We delivered strong organic sales growth, gross margin improvement and higher earnings per share," CEO Mike Hsu said in a press release. "In addition," Hsu continued, "we generated $90 million of cost savings and returned $520 million to shareholders through dividends and share repurchases."

Management said that together these operational and financial wins constituted "excellent progress" in their rebound strategy.

Looking forward

As P&G did in its last two quarterly reports, Kimberly-Clark announced an increase in its outlook for the rest of the year. Executives now see sales rising by about 3% compared to the prior 2% target and P&G's 4% forecast.

The earnings forecast rose thanks to the combination of faster growth at higher prices and an improved outlook on input costs for materials like pulp. Kimberly-Clark believes it can achieve adjusted earnings of between $6.65 and $6.80 per share in 2019, translating into growth of about 2% compared to the prior forecast of flat profits. With the exception of those sluggish sales volumes, which might recover over the coming quarters, that outlook implies a strengthening rebound for the business following two disappointing years of slowing growth.