Consumer products stocks are often viewed as more stable than other stocks. Indeed, Kimberly-Clark (NYSE:KMB) and its peers sell products that are used every day in millions of households across the world. This results in fairly consistent growth.
However, it's a mistake to think consumer staples stocks, Kimberly-Clark included, are risk-free. Any stock has its fair share of risks. Even though Kimberly-Clark has some well-known brands, including Kleenex, Scott, and Huggies, it's battling a fair share of headwinds right now.
Here are three reasons why Kimberly-Clark shares could underperform going forward.
Rising input costs
Last quarter, Kimberly-Clark's diluted earnings per share declined by approximately 1%. Management attributed this primarily to rising input costs. Inflation is hitting Kimberly-Clark fairly hard. Input costs increased by $60 million last quarter, of which $15 million was due to higher fiber costs and $45 million was due to higher costs of raw materials other than fiber.
In response, management has embarked on a cost-savings program called FORCE, which stands for Focus On Reducing Costs Everywhere. This helped shave $75 million off operating costs in the last quarter, but there's only so much that can be done to cut costs.
Should inflation persist, Kimberly-Clark will have trouble posting earnings growth for the remainder of this year, and that could adversely impact its stock price.
A strengthening U.S. dollar
Kimberly-Clark's sales are suffering in part because of the strengthening U.S. dollar. Companies that do business across the world, as Kimberly-Clark does, see net sales drop when the U.S. dollar increases in value versus other currencies. In these instances, sales generated in other parts of the world are converted into fewer U.S. dollars.
This is why net sales are fairly unimpressive across the industry at the moment. For example, competitor Procter & Gamble (NYSE:PG) posted a 1% sales decline last quarter. Fiscal 2014 sales increased just 1%, and management attributed a negative 2-percentage-point impact to foreign exchange.
For its part, Kimberly-Clark's net sales increased 1% last quarter. Organic sales -- for which Kimberly-Clark excluded foreign-currency impacts and lower sales as a result of European strategic changes and pulp and tissue restructuring actions -- increased a more satisfactory 5%, but the strengthening U.S. dollar is nevertheless a headwind.
Competition from cheaper alternativesComplicating matters even further is that Kimberly-Clark faces stiff competition from lower-end competitors. Kimberly-Clark's core brands, which include Kleenex and Huggies, are premium brands that command relatively high pricing.
On the lower-end, generics and cheaper competitors can undercut Kimberly-Clark on pricing. This was one of the reasons why Kimberly-Clark management narrowed earnings guidance for the remainder of the year.
Kimberly-Clark is more exposed to the health of the consumer than companies that offer cheaper brands. Kimberly-Clark specifically cited the difficult environment in its last earnings report, which means it's under pressure from consumers opting for lower-priced items if the economy stagnates.
The Foolish takeaway
Kimberly-Clark is a highly profitable company and offers a 3% dividend yield at its current share price, which may be attractive to income investors. At the same time, investors should be concerned about growth and total return potential.
Kimberly-Clark is under pressure from rising input costs, the continued strengthening of the U.S. dollar, and cheaper alternatives on store shelves. Even though management projects 5% earnings growth this year, Kimberly-Clark has produced just 1% growth in diluted earnings per share over the first half of the year.
Unless these headwinds subside, it will be difficult for management to meet its goals, and that might not sit well with investors. Kimberly-Clark's dividend yield will be of little consolation if it doesn't get better control of its raw materials costs, the U.S. dollar keeps strengthening, and if brands with lower price-points steal market share in a difficult economic environment.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.