Investors had modest expectations heading into the second-quarter report from Kimberly-Clark (KMB 0.77%). Yes, the company in April announced double-digit sales growth as the COVID-19 pandemic began pushing demand toward its staple products like diapers and tissue paper. But the lift wasn't expected to persist deep into its fiscal 2020.
On Thursday, Kimberly-Clark's actual results confirmed the slowdown that shareholders were bracing for. Yet the company exceeded many of the low expectations that investors had for the business. Sales growth was solid, earnings and cash flow spiked, and Kimberly-Clark issued a positive outlook for the full year.
Let's take a closer look.
Easing back down to normal
As expected, sales gains decelerated from the 11% spike that Kimberly-Clark reported back when consumers were stocking up on supplies during stay-at-home orders. But the company is still expanding at a more robust rate than before the pandemic.
Organic sales rose 4% overall, compared to 2% in late 2019. The mix of sales contained a healthy balance between increased volumes, higher prices, and a shift toward more premium products. The company's gains were particularly impressive in the U.S. geography, where sales jumped 12%. That impressive figure was offset by weakness in developing markets, especially in Latin America.
That level of growth could translate into market share gains against peers like Procter & Gamble (PG 0.18%), but investors will have to wait until P&G's report on July 30 to directly compare the two companies' expansion rates.
The brightening financial picture that investors saw in Q1 continued into the second quarter. Kimberly-Clark generated a record $1.6 billion of operating cash flow. Gross and operating profit margins both improved thanks to reduced expenses and lower commodity prices, and all these trends combined to push adjusted earnings up 32% to $2.20 per share.
"We achieved very good organic sales growth," CEO Mike Hsu said in a press release, "and all-time record adjusted earnings and cash flow." Kimberly-Clark's operating profit through the first half of the year is $2 billion compared to $1.6 billion a year earlier.
A brighter outlook
All that financial success has executives feeling more confident about the short term, even though COVID-19 still threatens to keep demand trends volatile. Management is restarting its stock buyback program and has issued a new operating outlook after withdrawing its forecasts in April.
That forecast calls for organic sales to grow by between 4% and 5%, translating into a significant increase from Kimberly-Clark's initial prediction of around 2%. Procter & Gamble's most recent forecast was for a similar growth rate for the consumer staples titan. Kimberly-Clark's adjusted earnings should rise to as high as $7.60 per share, too, compared to the earlier target of $7.35 per share. "We are delivering excellent financial results," Hsu said.
Better still, management has plenty of resources available to direct toward growth investments in places like marketing and product innovation thanks to its lower cost profile and surging cash flow. Those bets are the surest path toward sustaining Kimberly-Clark's improving market share position and delivering strong total returns to shareholders.