Kimberly-Clark's
The maker of Huggies diapers and Scott-brand paper towels posted fourth-quarter revenue of $5.0 billion, up 8.4% from the year-ago period. Foreign currency and stronger pricing drove the gain, although higher volumes did pitch in 2%. Earnings per share also looked good, increasing nearly 16%, to $1.17.
Full-year performance was less favorable. Higher selling prices failed to fully offset the combination of adverse foreign exchange and slightly lower volumes. All told, sales slipped by 1.5%, to $19.1 billion.
Meanwhile, annual earnings per share increased 9% year over year, to $4.52, making the low end of company guidance. However, without the added benefit of significantly lower commodity prices, management's cost-saving measures alone would've been outmatched by a variety of financial headwinds, and shareholders would've been left nursing an EPS decline.
The market certainly hasn't celebrated the performance. Quarterly earnings came in below analyst estimates, and management's 2010 EPS guidance of $4.80 to $5.00 also disappointed Wall Street. I'm not suggesting that investors run out of the stock just because a bunch of analysts were proven overly optimistic, but Kimberly-Clark's latest showing does invoke legitimate concerns.
To keep thrifty shoppers coming back for more of the company's paper towels, tissues, and toilet paper -- hardly the sort of products that tug at consumers' heartstrings --management has been earnestly slashing prices. Often, higher volumes would financially balance out such discounting, as consumers load up the shopping cart with bargains.
Unfortunately, things aren't quite proceeding according to the model. Sales for the consumer tissue segment (the company's second-largest division) were down 2%, even as management eased prices by 1%. Although volume rose from the previous quarter, it was still negative on an annual basis. The situation was at its worst in North America, where organic sales fell 6% and paper towel volumes dove at a double-digit rate. Yikes, who's going to clean up that spill?
Discounting was more effective in the personal care segment, which includes the Huggies and Kotex brands. Here, lower prices drove volume gains, in turn boosting the top line by 1%. Better yet, sales of disposable health-care products, which include exam gloves and surgical gowns, jumped roughly 22%. This, however, is by far the company's smallest segment.
All things considered, the dynamics in consumer tissue cannot be overlooked. As discussed by analysts and management on the conference call, this segment presents something of a pickle: With paper-pulp costs rising, failure to lift prices hurts margins, while not lowering prices means that even more consumers migrate to private-label alternatives. Need a Kleenex yet?
I previously highlighted management's struggle to maintain operating margins, and the points mentioned above indicate that shareholders may soon be in for more of the same. All of which explains why over the past five years, shares have underperformed those of Procter & Gamble
On the other hand, in the large-cap consumer-staples space, Kimberly-Clark's 4% dividend yield is matched only by H.J. Heinz
Ultimately, it's hard to justify Kimberly-Clark as a top sector pick. I recommend that those who do own shares keep a close eye on the company's operating margin. If any single metric is going to presage the stock's direction, that'd be it.
Related Foolishness:
