Kimberly-Clark (KMB) Lags Q3 Earnings, Tightens 2016 View

Consumer products giant Kimberly-Clark Corporation (NYSE:KMB) posted weaker-than-expected results in the third quarter of 2016, wherein both earnings and revenues missed the Zacks Consensus Estimate. Shares declined 0.4% in pre-market trading.

Adjusted earnings of $1.52 per share lagged the Zacks Consensus Estimate of $1.54 by 1.3% but increased 7.8% from the year-ago figure of $1.41. Year over year, earnings were boosted by cost savings, input cost deflation, improved operating profits and lower tax rates. However, earnings were negatively impacted by unfavorable foreign currency exchange rate effects.

Quarter in Detail

The company reported sales of $4.594 billion in the third quarter. Sales missed the Zacks Consensus Estimate of $4.724 billion by 2.8% and declined 2.6% from the prior-year quarter, mainly due to foreign currency headwinds and lower pricing mix. Currency reduced the quarter’s sales by more than 2%. Volumes and pricing were flat.

Excluding the aforementioned headwinds, organic sales remained flat with the prior-year quarter. Organic sales increased 3% in developing and emerging markets, but were down elsewhere.

Adjusted operating profit in the third quarter of 2016 (excluding organization restructuring costs) grew 1% to $836 million. It was mainly driven by $105 million of cost savings from the FORCE (Focused on Reducing Costs Everywhere) program and $15 million of savings from the organization restructuring announced in 2014. Input costs also decreased $10 million in the quarter due to lower fiber costs. However, this was offset by unfavorable currencies, which reduced adjusted operating profit by $10 million. Lower net selling prices and unfavorable product mix, along with ongoing manufacturing-related cost increases also led to the decline.

Segment Details

Personal Care Products: The segment includes products like disposable diapers, training/ youth/swim pants, baby wipes, feminine and incontinence care products.

Segment sales declined 2% on a year-over-year basis to $2.3 billion in the third quarter of 2016 due to unfavorable currency and lower selling prices offsetting the gains from higher volumes. Sales improved in developed markets outside North America, but declined in North America, and developing and emerging markets.

Segment operating profit also fell 5% to $458 million in the quarter due to unfavorable currency rates, changes in net selling prices and product mix and increased marketing, research and general spending, offset by volume growth and cost savings.

Consumer Tissue: The segment includes bathroom tissue, paper towels, napkins and related products for household use.

Segment sales dropped 4% to $1.5 billion in the third quarter of 2016 due to unfavorable currency and lower volumes. Sales declined in all the regions of North America, developed markets outside North America, and developing and emerging markets.

Segment operating profit increased 3% to $267 million in the quarter, benefiting from organic sales growth, cost savings and input cost deflation, partially offset by unfavorable currencies and lower organic sales.

K-C Professional (KCP) & Other: The segment consists of facial and bathroom tissue, paper towels, napkins, wipers and a range of safety products.

Segment sales declined 3% to $0.8 billion in the third quarter due to unfavorable currencies, lower product/mix and lower volumes, which offset the impact of higher selling prices. Sales improved in North America but declined in developed markets outside North America, and developing and emerging markets.

However, segment operating profit improved 2% to $157 million, driven by higher selling prices and cost savings, partially offset by unfavorable currency effects and lower volumes.

Organization Restructuring

In Oct 2014, Kimberly-Clark initiated a restructuring program in order to improve organization efficiency and underlying profitability, increase the company's flexibility to invest in targeted growth initiatives and offset overhead costs stemming from the spin-off of its health care business.

The restructuring is expected to be completed by the end of 2016, with total costs anticipated to be toward the high end of the previously announced range of $130–$160 million after tax. Cumulative pre-tax savings from the restructuring are expected to be toward the high end of the previously communicated range of $120–$140 million by 2017 end.

Through the end of the third quarter of 2016, cumulative restructuring costs were $149 million after tax and cumulative savings were $115 million.

Other Financial Update

In the third quarter, the company repurchased 1.7 million shares at a total cost of $225 pursuant to a share repurchase program. The company expects full-year share repurchases of $750 million (prior target $700–$800 million).

Guidance for 2016

The company has tightened its guidance for 2016. It now expects adjusted earnings per share in the range of $5.95–$6.05, compared with the previous range of $5.95–$6.15. The new guidance is up 3%–5% from adjusted earnings of $5.76 in 2015.

Organic sales are now expected to be 2% in 2016, compared with the prior year’s expectation of growth at the low end of the previously guided range of 3%–5%. The impact of foreign currency exchange on net sales and operating profit is expected to be in the range of 3%–4% (compared with the previous expectation of 4%–5% range).

Zacks Rank

Kimberly-Clark has a Zacks Rank #4 (Sell).

Some well-positioned consumer staples companies include The Kraft Heinz Company (NASDAQ:KHC) , Colgate-Palmolive Co. (NYSE:CL) and The Clorox Company (NYSE:CL) .

Kraft Heinz has an average positive earnings surprise of 5.22% in the trailing four quarters with a long-term earnings growth rate of 19.54%. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While Colgate-Palmolive has a long-term earnings growth rate of 7.82%, Clorox has a long-term earnings growth rate of 7.07%. Both the stocks hold a Zacks Rank #2 (Buy).

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