Can Kimberly-Clark's Revival Efforts Bring A Turnaround?

Kimberly-Clark Corporation (NYSE:KMB) has been losing sheen over the last few quarters due to slower organic sales growth amid highly competitive promotional environment. Nevertheless, we believe the company’s higher cost savings, continued product innovation, strong international presence to act as catalysts.

Let’s delve deeper to understand the factors which have been hurting the Zacks Rank #4 (Sell) company and find out if the company has the potential to rebound.

Slower Organic Sales Growth in Emerging Markets

Kimberly-Clark has been witnessing sluggish organic sales growth in developing and emerging markets over the last few quarters. We note that the company posted organic sales growth of 5% in both the first and second quarter of 2016, which decelerated to 3% in the third quarter. Though it showed some improvement in the fourth quarter of 2016 with organic sales growth of 4%, it remained flat in the first quarter of 2017 and grew just 2% in the second quarter of 2017. While performance improved in China, it softened in Latin America, particularly in Brazil and Argentina, due to lower volumes, and highly competitive promotional activity and a difficult economic environment.

Higher Commodity Costs due to Inflation

The company has been benefiting from lower commodities cost through 2016. However, the company now anticipates a rise in input costs in 2017, on a modest increase in inflation, going ahead. The company anticipates higher prices of raw materials, including pulp, in 2017.

Weak Quarterly Performance

Kimberly-Clark was unable to pull off the second quarter of 2017 earnings due to higher input cost inflation and lower sales due to softness in North America. Kimberly-Clark reported weaker-than-expected numbers in the second quarter of 2017, wherein both earnings and revenues lagged the Zacks Consensus Estimate. Notably, sales have missed the Zacks Consensus Estimate in five out of the last seven quarters. Following the dismal third-quarter results, the company forecasts soft earnings guidance for full year and now expects earnings per share at the low end of its previous targeted range of $6.20-$6.35.

What Lies Ahead?

In order to improve the company’s sales and profits, Kimberly-Clark remains focused on innovating products on a regular basis. The company believes that innovation helps in improving brand positions and market share in the consumer categories. The company is focusing in the training pant category to drive growth. In the second quarter of 2017, the company launched innovative ranges of Huggies for markets of China and Russia. Over the near term, the company has a number of products lined up for launch in North America, including Huggies Snug and Dry diapers, Good Nights youth pants, and Depend underwear.

Kimberly-Clark is also aggressively cutting costs through a program called Focus on Reducing Costs Everywhere (FORCE) to boost profits. As a result, for 2017, the company expects to generate cost savings in the range of $425-$450 million from the FORCE program, up from the earlier forecast of $400 million.

While sluggish organic sales growth in Latin America is hurting the company’s sales. The company is witnessing increased organic sales in diapers in Eastern Europe and China due to strong volume growth and innovation. In China, volume growth is expected to remain healthy along with improvement in pricing in 2017. In fact, the company expects modest improvement in the overall environment in developing and emerging markets in the second half of 2017, despite the current promotional environment.

Share Price Performance and Estimates Trend

The consumer products giant has exhibited a bearish run over the last one year. However, the decline was almost in line with the industry’s decline. If we look into the last one month’s performance, we note that the stock declined roughly 1.3%, narrower than the industry’s decline of 2.9%. The industry is currently placed at the top 27% of the Zacks Classified industries (72 out of 256). This signals that the company’s initiatives to turnaround the stock is bearing fruit.

The Zacks Consensus Estimate for the current quarter and for the full year 2017 has remained unchanged in the last 30 days period, in contrary to the estimates revision over the last 60 days. The Zacks Consensus Estimate for the current quarter is pegged at $1.55, down from $1.60 per share in the last 60 days. Similarly for 2017, the Zacks Consensus Estimate declined from $6.29 per share to $6.22, over the same time frame.

Bottom Line

Though we cannot ignore the fact that Kimberly-Clark has been witnessing slower organic sales growth, due to highly competitive promotional activity since past many quarters, we believe the company’s higher cost savings, continued product innovation, strong international presence have been the positive catalysts to bring a turnaround in the stock in the near term.

Stocks to Consider

Some better-ranked food stocks in the industry are Post Holdings Inc. (NYSE:POST) , Ingredion, Inc. (NYSE:INGR) and The Chefs' Warehouse, Inc. (NASDAQ:CHEF) .

Post Holdings has an average positive earnings surprise of 11.32% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingredion has an average positive earnings surprise of 4.98%, while Chef’s Warehouse has an average positive earnings surprise of 0.08%.

Both Ingredion and Chef’s Warehouse carry a Zacks Rank #2.

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