Kimberly-Clark (NYSE:KMB) is in a bind. The consumer products giant, which owns hit global brands like Kleenex and Huggies, is seeing a significant growth slump following surging pandemic demand for essentials. Consumers aren’t as eager to buy home-maintenance supplies, and they’re taking their time working through their stuffed pantries.
At the same time, costs are rising on everything from fuel to inputs like paper pulp, meaning the company must hike prices even as volumes fall.
In a conference call with Wall Street analysts, CEO Mike Hsu and his team explained why these challenges forced a second straight downgrade to Kimberly-Clark’s short-term outlook even as the wider growth picture remains bright.
Let’s look at three highlights from that earnings call.
1. Short-term pain
Kimberly-Clark’s 3% sales decline was weaker than management had projected back in April. The core problem was an 11% organic sales drop in the U.S. market due to collapsing demand for consumer paper products as compared to last year. People are still working through their stock of toilet paper and tissues, which has also made it harder to forecast demand rates. “That [tissue] decline has meaningfully outpaced our expectations,” Hsu said.
The company’s other big challenge is rising prices on commodities, transportation, and labor. These boosts pressured earnings and profitability this quarter and have forced management to increase prices in the face of slowing demand. The silver lining to this problem is that it’s an industry-wide issue that should resolve itself over the next few quarters.
2. Bright spots
Kimberly-Clark’s results weren’t all bad. Sales were up in its developing-market segment on strong volume. The company edged past Procter & Gamble (NYSE:PG) in the key diaper niche in China and Brazil. And its professional division, which caters to enterprises, is rebounding after plummeting during the work-from-hope pandemic peak. “Despite near-term challenges, we have plenty of bright spots in our business,” Hsu said.
These wins have management feeling confident that the overall business will show improving results for the second half of fiscal 2021, even if the pace of that rebound will be slower than it originally projected.
3. The downgrade isn’t bad
Executives lowered their 2021 outlook for the second straight time and now see organic sales falling slightly this year, with earnings taking a bigger hit. Most of the pressures that affected the second quarter will stick around for the next quarter or two.
Despite that weaker forecast, investors might start seeing signs of growth by the fourth quarter. Demand should settle down to more-normal patterns by then, and its latest price increases will be taking effect.
There’s a risk that these price hikes will amplify Kimberly-Clark’s volume challenges, but management doesn’t think that scenario will play out. Instead, the business should be showing improving fundamentals by the fall and early winter months, executives say. “We believe the major factors impacting this quarter do not reflect the fundamental health of the business,” Hsu said.
Investors will know in a few months if this forecast was a bit too optimistic, like Kimberly-Clark’s April outlook turned out to be.
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