Investors had low expectations heading into Kimberly Clark's (KMB -0.28%) earnings report but were still disappointed by what the consumer staples giant had to say. Growth is slowing in 2021, as expected, compared to booming demand for products like tissue paper through the early phases of the pandemic. But that slowdown is more intense than management had predicted, and it's coming at a time when costs are spiking.
Those negative trends convinced Kimberly Clark to push its outlook down for the rest of what's shaping up to be a forgettable fiscal year for shareholders. Let's dive right in.
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The pandemic slump continues
Demand trends improved slightly in recent weeks, with organic sales falling 3%, compared to last-quarter's 8% slump. But Kimberly Clark had been expecting a bigger bounce, despite pressure from pantry-stocking behavior in mid-2020.
"Our second quarter reflects continued pandemic-driven volatility," CEO Mike Hsu said in a press release. "We are facing significantly higher input costs and a reversal in consumer tissue volumes from record growth in the year ago period."
Looking more deeply into the sales trends shows weakness in a few key areas. Sales volumes were down 4%, and prices only increased 1%. Procter & Gamble (PG 0.86%), which reports its results in a few days, has been enjoying faster growth and a good balance of increased volumes and prices. Kimberly Clark's report implies that the selling environment worsened into the early summer weeks.
Pricing challenges
The news wasn't good on the earnings front, either. Kimberly Clark reported a 17% drop in gross profit. Net income fell 45%, compared to a year ago. Cash flow was also down sharply, although it's up when compared to 2019.
Management admitted that this financial pressure was forcing a change in strategy on both prices and the cost-cutting program. "We have moved decisively to take pricing actions to mitigate inflationary headwinds and prudently manage costs," Hsu said. The consumer staples company endured higher input costs, but also spikes in the manufacturing and supply chains.
Looking ahead
Kimberly Clark lowered its outlook across the board to reflect the weak results it has managed through the first six months of 2021. Sales are now predicted to fall by about 1%, rather than rise by less than 1%.
Adjusted operating profit will take a bigger hit as the company tries to balance price increases against falling sales volumes. Earnings are now on track to land between $6.65 per share and $6.90 per share, down from the prior forecast of $7.30 per share to $7.55 per share.
Investors will know more about whether these are industrywide challenges when P&G announces its earnings results on July 30. But for now, it's clear that Kimberly Clark is enduring a growth hangover compared to 2021, which is being complicated by rising prices. Those factors paint a gloomy short-term picture for the industry's dominant tissue producer.
