Company Reports

Like peers, narrow-moat Kimberly-Clark has been inundated by a slew of challenges, including a tepid economic environment and elevated cost pressures. In this context, management has been forthright that its market share has lagged, and consumers are increasingly trading down to lower-priced options in select categories to preserve cash. We think this could prompt a step-up in promotions across its categories—now that industrywide supply/demand imbalances have largely been put to rest.

Like peers, narrow-moat Kimberly-Clark has been inundated by a slew of challenges, including a tepid economic environment and elevated cost pressures. In this context, management has been forthright that its market share has lagged, and consumers are increasingly trading down to lower-priced options in select categories to preserve cash. We think this could prompt a step-up in promotions across its categories—now that industrywide supply/demand imbalances have largely been put to rest.

Narrow-moat Kimberly-Clark's commitment to investing in consumer-valued innovation and stringently unlocking productivity savings ($120 million in the quarter) yielded a 6% increase in organic sales (on a 4% benefit from higher prices, primarily in inflationary economies) and a 390-basis-point boost in gross margin to 37.1% in its first fiscal quarter. With fiscal 2024 off to a strong start, management beefed up its adjusted EPS growth outlook to a low-teens from a high-single-digit percentage; we plan to bump up our high-single-digit EPS growth forecast to within the revised range. When combined with a time value of money benefit, our $139 fair value estimate should increase by a low-single-digit percentage, leaving shares fairly valued after a mid-single-digit pop on the news.

Narrow-moat Kimberly-Clark's investor day heightened our confidence in the firm's ability to meet our long-term forecasts as it charts a more defined path forward. More specifically, Kimberly intends to capitalize on cost savings and drive efficiencies by deploying new technologies, rationalizing stock-keeping units, modernizing supply chains, and strategically realigning its organizational structure to prudently fuel persistent consumer-led innovation and enhance margins. Overall, these initiatives are expected to yield over $3 billion in gross productivity gains, $200 million in selling and administrative savings, and $500 million in working capital improvements. This is balanced against a one-time $1.5 billion restructuring charge, half of which is in cash, over the next three years. Against this backdrop, management unveiled a long-term outlook that anticipates organic sales to grow ahead of the market’s low-single-digit rate, mid- to high-single-digit increases in adjusted operating profit and EPS, and a minimum of $2 billion in annual free cash flow. All of this aligns closely with our forecast, while fiscal 2024 expectations were unchanged. As such, we don’t plan much change to our $139 fair value estimate and view shares as attractive.

Like peers, narrow-moat Kimberly-Clark has been inundated by a slew of challenges, including a tepid economic environment and elevated cost pressures. In this context, management has been forthright that its market share has lagged, and consumers are increasingly trading down to lower-priced options in select categories to preserve cash. We think this could prompt a step-up in promotions across its categories—now that industrywide supply/demand imbalances have largely been put to rest.

We expect to maintain our $136 fair value estimate for narrow-moat Kimberly-Clark apart from a low-single-digit percentage uptick for time value after digesting fair fourth-quarter marks of 3% organic sales growth and 210 basis points of expansion in gross margin. Further, its initial fiscal 2024 guidance for low- to mid-single-digit organic sales growth and high-single-digit adjusted EPS growth generally aligns with our forecasts. However, the stock pulled back by 5.5% on Jan. 24 after the print. We believe the market’s concern centers around the potential for intensifying competition, particularly from lower-priced private-label fare, and Kimberly’s response. But we see this trepidation as overblown and view shares as attractive at a 10%-15% discount to our intrinsic valuation.

Like peers, narrow-moat Kimberly-Clark faces a slew of challenges, including a tepid economic environment and elevated cost pressures. In this context, management has been forthright that its market share has lagged, and consumers are beginning to trade down to lower-priced options in select categories to preserve cash. Although we anticipate promotions could creep up (after being held back by industrywide supply/demand imbalances the past few years), we concur with the firm’s stance that discounting won’t drive long-term market share gains or support the intangible assets that underpin Kimberly’s narrow moat. On top of this, though, commodity cost inflation persists (with resin-based materials and energy costs trending higher), and as such, Kimberly is forecasting an incremental headwind of about $50 million this year, on top of a $3.0 billion step up over the past two years. This pressure is compounded by unfavorable foreign currency movements, which stand to eat into fiscal 2023 operating income to the tune of $450 million.

Kimberly-Clark sought to put to rest questions surrounding the resiliency of consumers with its solid third-quarter marks that included organic sales growth of 5%. The standout was its North American personal care arm (the product segment in aggregate represents about 50% of its business, with North America its largest geographic market, at more than 50% of sales and nearly 80% of operating profits), which chalked up 6% volume growth on a 3% benefit from higher prices and improved mix. And even if industrywide promotions step up to counteract a more precarious consumer spending backdrop, management’s rhetoric suggests a race to the bottom is unlikely given such a path would fail to drive long-term market share gains or support the intangible assets that underpin Kimberly’s narrow moat.

Like peers, narrow-moat Kimberly-Clark faces a slew of challenges, including a tepid economic environment and elevated cost pressures. In this context, management has been forthright that its market share is lagging, and consumers are beginning to trade down to lower-priced options to perserve cash. Although we anticipate promotions could creep up (after being held back by industrywide supply/demand imbalances the past few years), we concur with the firm’s stance that discounting won’t drive long-term market share gains or support the intangible assets that underpin Kimberly’s narrow moat. On top of this, though, commodity cost inflation persists (serving as a 750-basis-point drag to gross margins in fiscal 2022), with Kimberly forecasting an incremental headwind of about $100 million this year, on top of a $3.0 billion step up over the past two years. And Kimberly is battling unfavorable foreign currency movements, which stand to eat into fiscal 2023 operating income to the tune of $300 million-$400 million.

We don’t foresee a material change to our $134 fair value estimate (beyond time value) for Kimberly-Clark after digesting solid second-quarter marks—5% organic sales growth and a 380-basis-point increase in gross margin to 34%. Management bumped up its full-year outlook to 3%-5% organic sales growth (from 2%-4%) and to 10%-14% adjusted EPS growth (from 6%-10%), but the market was less enthusiastic, sending shares down around 4%, leaving the stock in a range we’d consider fairly valued.

Like peers, narrow-moat Kimberly-Clark faces a slew of challenges, including a weak economic environment and elevated cost pressures. While we didn't anticipate the pronounced pandemic level volumes would persist (particularly as mobility restrictions ease), commodity cost inflation has outpaced our expectations (serving as a 750-basis-point drag to gross margins in fiscal 2022), and these pressures are unlikely to abate in 2023, with Kimberly forecasting an incremental headwind of $100 million-$200 million this year, on top of a $3.0 billion step up over the past two years. In addition, Kimberly is battling unfavorable foreign currency movements, which stand to eat into fiscal 2023 operating income to the tune of $300 million-$400 million.

Narrow-moat Kimberly-Clark bucked macro and competitive headwinds in the first quarter to post 5% organic sales growth and 340 basis points of expansion at the gross margin line to 33.2%. In light of these results, management bumped up its fiscal 2023 adjusted EPS growth forecast to 6%-10% (from 2%-6%), though its 2%-4% organic sales outlook is unchanged. While we’ll edge up our near-term gross margin expectation, our $133 fair value estimate shouldn’t move (beyond a $1-$2 bump for time value). However, we think investors should remain on the sidelines, with shares trading at nearly a 10% premium to our intrinsic valuation.

Like peers, narrow-moat Kimberly-Clark faces a slew of challenges, including a weak economic environment and elevated cost pressures. While we didn't anticipate the pronounced pandemic level volumes would persist (particularly as mobility restrictions ease), commodity cost inflation has outpaced our expectations (serving as a 750-basis-point drag to gross margins in fiscal 2022), and these pressures are unlikely to abate soon, with Kimberly forecasting an incremental headwind of $200 million-$300 million this year, on top of a $3.0 billion step up over the past two years. In addition, Kimberly is battling unfavorable foreign currency movements, which stand to eat into fiscal 2023 operating income to the tune of $300 million-$400 million.

While narrow-moat Kimberly-Clark posted a fair end to the fiscal year (with 5% organic sales growth and 270 basis points of gross margin gain to 32.8%), the firm struck a cautious tone on its prognosis for fiscal 2023. For one, it anticipates costs will remain elevated, forecasting incremental headwinds amount to $200 million-$300 million this year, on top of a $3.0 billion step up over the past two years. In addition, Kimberly is battling unfavorable foreign currency movements, which stand to eat into operating income to the tune of $300 million-$400 million. We don’t believe the firm is sitting still, with additional price hikes slated in the coming months combined with its continued pursuit of inefficiencies to unlock additional savings.

From our vantage point, narrow-moat Kimberly-Clark continues to be challenged as it works to navigate a volatile demand environment and pronounced cost pressures. While we didn't anticipate the significant level of consumer stock-ups realized since the onset of coronavirus would persist (particularly as mobility restrictions ease), commodity cost inflation has outpaced our expectations (serving as a more than 700-basis-point drag to gross margins in the third quarter), and these pressures are unlikely to abate. In this context, Kimberly expects inflation in the range of $1.4 billion to $1.6 billion in fiscal 2022, on top of the $1.5 billion in incremental costs incurred in fiscal 2021.

We don’t plan to alter our $126 fair value estimate (outside of a low-single-digit time value bump) for Kimberly-Clark after digesting third-quarter marks. The firm chalked up 5% organic sales gains but struggled to harvest profits, with operating margins off 190 basis points to 13%. This was primarily driven by raw material, packaging, transportation, and logistics costs that have yet to abate, serving as a more than 700-basis-point hit to gross margins in the quarter (which held flat at 30.5%).

From our vantage point, narrow-moat Kimberly-Clark continues to struggle navigating a volatile demand environment and pronounced cost pressures. While we didn't anticipate the significant level of consumer stock-ups realized since the onset of coronavirus would persist (particularly as mobility restrictions ease), commodity cost inflation has outpaced our expectations (serving as an 800-basis-point drag to gross margins in the second quarter), and these pressures are unlikely to abate. In this context, Kimberly expects inflation in the range of $1.4 billion to $1.6 billion in fiscal 2022, on top of the $1.5 billion in incremental costs incurred in fiscal 2021.

The torment from skyrocketing costs and supply chain disruptions continued to plague Kimberly-Clark’s profits in the quarter. Inflation served as an 800-basis-point drag on gross margins, a modest retraction from the 900-basis-point hit in the first quarter. However, management now expects to incur incremental costs in fiscal 2022 of $1.4 billion to $1.6 billion (up from its $750 million to $900 million outlook six months ago), which is on top of the $1.5 billion digested a year ago, primarily stemming from higher fiber, pulp, and energy costs.

From our vantage point, narrow-moat Kimberly-Clark continues to struggle navigating a volatile demand environment and pronounced cost pressures. While we didn't anticipate the significant level of consumer stock-ups realized since the onset of coronavirus would persist (particularly as mobility restrictions ease), commodity cost inflation outpaced our expectations (serving as a 900-basis-point drag to gross margins in the first quarter--the highest level it has ever seen), and these pressures are unlikely to abate. In this context, Kimberly expects inflation in the range of $1.1 billion to $1.3 billion in fiscal 2022, on top of the $1.5 billion in incremental costs incurred in fiscal 2021.

The market found favor with narrow-moat Kimberly-Clark’s swelling first-quarter sales growth metrics, sending shares up to the tune of nearly 10%. While we acknowledge a 10% jump in organic sales is impressive at first blush (composed of a 6% benefit from higher prices and 2% each from increased volumes and favorable mix), we don’t think it strikes the same chord when juxtaposed with the 8% decline posted in the year-ago period (which was constrained by weather-related disruptions and pantry destocking).