3 Surprises in Kimberly-Clark Corp's Quarterly Results

By Demitrios Kalogeropoulos Markets Fool.com

Kimberly-Clark (NYSE: KMB) has a relatively stable business thanks to its deep portfolio of consumer brands like Kleenex tissues and Huggies diapers that millions of people use on a daily basis. But that doesn't mean the company can't occasionally surprise investors with shifts in its operating trends and changes in the market outlook.

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With that in mind, here are three important things from this past week's quarterly report that shareholders likely didn't see coming.

A drop in prices

The company posted a 1% decline in organic sales, continuing a disappointing trend around revenue gains. Its expansion pace was a healthy 5% for the 2015 fiscal year, before slowing to a 2% pace last year and falling again to a slightly negative rate to kick off fiscal 2017.

Image source: Getty Images.

The biggest factor in this latest slump was lower prices. Kimberly-Clark reduced net selling prices by more than a full percentage point, which wiped out the gains produced by the minor uptick in sales volumes.

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Management blamed spiking competition in the U.S. market for the shift. Organic sales dove by 3% in that segment, "reflecting category softness, competitive activity, and less promotion shipments," executives explained.

Rival Unilever (NYSE: UL) fared better by posting a 1% organic sales drop in the U.S. geography as it gained share despite a shrinking overall industry. Kimberly-Clark, in contrast, couldn't claim market-share gains and instead had to settle for rising profits. "We delivered earnings growth despite a challenging environment, particularly in North America," CEO Thomas Falk said in a press release.

Costs and currencies

Currency exchange rates changes have swung from a having a heavy weight on results to giving a slight boost. In fact, currency shifts increased reported sales by 1% this quarter, after having caused a 4% reduction last year and a whopping 11% hit in 2015.

Image source: Getty Images.

As a result, management now sees foreign exchange moves having zero effect on sales or profits this year, compared to its prior forecast of a 2% decline in both. However, that surprising gain is being completely offset by rising commodity costs. Kimberly-Clark has seen a few core inputs spike, and so cost inflation is projected to be about $200 million in 2017 compared to a prior estimate of $125 million.

There's no bottom-line effect on earnings between these two trends, which is why the company still projects 2017 profits will weigh in at between $6.20 per share and $6.35 per share, up roughly 5% from the $5.99 per share it posted last year.

Lower outlook

Kimberly-Clark doesn't see the weak conditions in the U.S. market improving any time soon. Falk and his team now project overall organic gains coming in at 1.5% at the midpoint of guidance, which is a slight downgrade from their prior forecast of 2%. By comparison, Unilever expects to grow by 4%.

If the company doesn't outperform the latest target, 2017 will mark the second straight year that Kimberly-Clark has endured slowing sales growth, with organic revenue gains slumping from 5% to less than 2% since 2015.

Executives are ramping up their cost-cutting plans and will likely consider aggressive portfolio improvements to get sales growth back on track -- just as rivals have done in recent years. Unilever, for example, is divesting its spreads business and adding new product lines like Dollar Shave Club. Procter & Gamblejust finished a huge portfolio reboot that saw it remove 100 brands from the portfolio to concentrate on just the fastest-growing, highest-margin franchises.

Initiatives like these might be needed as part of a bigger plan by Kimberly-Clark to improve its competitive position in the market now that it is losing share to global rivals as they step up their promotions and innovation strategies.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Unilever. The Motley Fool has a disclosure policy.