Investors haven't been happy with Kimberly-Clark's (NYSE: KMB) last few earnings reports. Sure, the maker of Kleenex tissues, Huggies diapers, and other brands managed to return to sales growth last quarter. But that result still translated into flat market share year over year, while profitability worsened.
The good news is that these stumbles have lowered expectations for Kimberly-Clark's second-quarter report, due out before the market opens on July 24. Let's take a closer look at the key metrics investors will be watching in that announcement.
Kimberly-Clark's annual financial targets start with sales growth that outpaces the broader consumer staples market. Yet the company has been falling short of that goal for over a year. Sales were flat in 2017, in fact, to mark the second straight year of decelerating gains.
Things are looking a bit brighter in fiscal 2018, as sales inched higher by 2% in the most recent quarter after three consecutive quarters of declines. Kimberly-Clark even outpaced rival Procter & Gamble (NYSE: PG) in what management called a "good start to the year." Investors will be watching for signs that this rebound is at least maintaining its positive pace and keeping the company on track for its broader goal of 1% growth in fiscal 2018.
Costs and prices
Kimberly-Clark had to pay a steep price for its return to sales growth last quarter as operating margin sank to 17.4% of sales from 18.8% in the prior year. That decline happened despite aggressive cost cuts tied to its restructuring plan.
Two negative trends combined to completely offset those savings. First, Kimberly-Clark had to cut prices in many of its biggest franchises. That promotional stance was driven partly by the sluggish industry growth pace and partly by aggressive moves made by rivals. Procter & Gamble, for example, cut its prices by 2% across its portfolio last quarter.
Second, the company endured rising raw material costs on key inputs like pulp. Because of the weak selling environment, Kimberly-Clark couldn't pass along those rising expenses to customers, so profitability took a hit. Management is hoping that these negative trends will ease over time, but it's likely that this week's report will reflect more profitability challenges.
The bigger picture
Kimberly-Clark's reorganization plan is running ahead of schedule, and that success is making up for the fact that costs are rising faster than expected this year. As a result, CEO Thomas Falk and his team still believe they will boost earnings to between $6.90 per share and $7.20 per share, equating to growth between 11% and 16%.
In April management also affirmed its sales growth guidance, calling for revenue to rise 1% after holding flat in 2017. That would mark the first time in three years that Kimberly-Clark's sales gains accelerated, which is an important first step in its turnaround effort.
From there, it's up to the company to execute the aggressive moves executives have outlined in innovating new products, cutting out underperforming brands, targeting higher-growth markets, and lowering supply chain costs.
These strategies aren't likely to have a quick impact on investor returns, though. After all, consumer staples giant P&G has been engaged in similar strategic moves for nearly three years and is still struggling to hit its operating targets. Kimberly-Clark, with its smaller portfolio and greater focus on the competitive U.S. market, could have an even tougher path to walk toward recapturing its past growth rates.
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