Kimberly Clark (NYSE:KMB) is suffering a growth hangover. The consumer-staples giant just reported a sharp drop in sales volumes as compared to a year ago, when people were stocking up on essentials at the start of the pandemic.

The slump was still a surprise, given that peers like Procter & Gamble are still growing. But Kimberly Clark's management still believes it can expand the business (just barely) in fiscal 2021. Let's take a closer look.

A baby plays with tissue paper.

Image source: Getty Images.

Stepping backwards

Organic sales dove 8%, marking a jarring shift from last-quarter's 5% increase. The drop stood out compared to P&G's decelerating but still strong 4% increase.

Kimberly Clark's management team said that most of the shortfall came from the tough comparison with a year earlier, when tissue paper was flying off the shelves at supermarkets and big-box chains. The company also endured weather-related shipping and manufacturing disruptions, which P&G seemed to have handled better.

Still, Kimberly Clark is optimistic about the strength of the broader business. "Our market shares remain healthy overall," CEO Mike Hsu said in a press release.

Costs and cash flow

The news wasn't much better with respect to profits. Kimberly Clark passed along some of its rising input costs (on things ranging from pulp to plastic) to consumers through higher prices and found savings in a few other places. But expenses still outpaced revenue to start the year, and so profitability fell.

KMB Operating Margin (TTM) Chart

KMB Operating Margin (TTM) data by YCharts.

As a result, operating income dropped to $770 million, or 16.2% of sales, from $904 million, or 18% of sales, a year earlier. P&G earlier in the week announced rising margins thanks to cost cuts, higher prices, and robust demand for premium products in its fabric-care and home-maintenance categories.

Looking ahead

While some of the Q1 challenges will reverse over the next few months, Kimberly Clark is still expecting a weaker fiscal year than the company projected just a few months ago. Sales are on pace to rise by less than 1%, it said, while the prior forecast had been for gains between 1% and 2%. That growth will come completely from higher prices as volumes fall in 2021.

Hsu and his team boosted their cost-cutting targets, yet the earnings picture still darkened. Adjusted profits will fall by between 3% and 6%. Prior targets called for a flat result or modest increase.

Management is optimistic that the business will be on stronger footing by the end of the year, especially as it concludes its major restructuring program. Shareholders should still expect solid cash returns from the dividend and stock buybacks.

But the big-picture trend isn't impressive because Kimberly Clark faces a tough period of having to raise prices, even as sales volumes fall. P&G appears better positioned to ride out that challenge, so investors looking for solid returns should consider buying that stock over Kimberly Clark today.

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