The pandemic isn't finished scrambling Kimberly-Clark's (KMB -0.85%) business. The consumer-staples giant recently said that it returned to sales growth in the fiscal third quarter and is still expecting only modest declines for all of 2021. However, earnings fell faster than expected, and surging costs will hurt profitability into 2022. Let's take a closer look.

A baby having its diaper changed.

Image source: Getty Images.

Organic sales are up

Organic sales rose 4% to mark a solid improvement over last-quarter's 3% decline. Kimberly Clark's growth trends have now improved for two consecutive quarters after falling 8% in the prior one.

But there were weaknesses in that core sales figure. Kimberly-Clark relied much more on rising prices than rival Procter & Gamble (PG -0.89%). Volume was roughly flat this quarter compared to P&G's 2% increase. Kimberly-Clark boosted selling prices by 3%, or a bit more than P&G's latest increase.

Management was happy with the performance but said it was heavily impacted by supply-chain challenges and inventory pressures. "Our third quarter results reflect a dynamic and challenging macro environment," CEO Mike Hsu said in a press release.

The big hit to earnings

The price hikes weren't enough to offset soaring costs. Instead, operating profit fell and gross profit margin dropped. Kimberly-Clark's net income declined 1% to $469 million.

Management implied that investors will see further earnings pressure well into 2022. "We will continue to invest in our brands and our capabilities," Hsu said.

KMB Operating Margin (TTM) Chart

KMB Operating Margin (TTM) data by YCharts.

Kimberly-Clark is planning additional cost cuts and price increases, but earnings will still likely land between $6.05 and $6.25 per share this year, down from the prior forecast range of $6.25 to $6.65. Before that, management was expecting earnings as high as $7.55 per share this year.

However, the supply-chain and cost issues have become worse and are "not likely to be resolved quickly," management said. Kimberly-Clark has also slowed its stock-repurchase spending as expenses jump.

Looking ahead

Kimberly-Clark's growth outlook held steady with the company still expecting to post a modest revenue drop this year after last-year's significant increase. Market-share trends are strong, thanks mainly to innovation and steep demand for premium home-care and baby-care products in the core U.S. market.

It's also good news that sales growth is speeding up, because that trend gives Kimberly-Clark more room to raise prices. Unfortunately, those hikes haven't erased the cost surge that the company is experiencing today. It might take a few more quarters before profitability starts climbing back to previous heights.

In the meantime, shareholders can collect Kimberly-Clark's generous dividend payment that today is yielding over 3.3%, or about 2 full percentage points higher than the wider S&P 500.

With earnings and stock buybacks each trending lower, that dividend income is becoming a bigger portion of investors' total returns right now. Ideally, returns will find a better balance ahead, with growth and profit margins rebounding as early as fiscal 2022.