Kimberly-Clark's Q1 Earnings In Line, Retains View - Analyst Blog

Consumer products giant Kimberly-Clark Corporation KMB posted adjusted earnings of $1.48 per share in the first quarter of 2014. Earnings were in line with the Zacks Consensus Estimate and the year-ago figure. Earnings were boosted by organic sales growth, cost savings and lower selling, general and administrative expenses, which made up for increased input costs and currency headwinds.

Quarter in Detail

The company reported sales of $5.3 billion in the first quarter. The results were almost in-line with the prior-year earnings and the Zacks Consensus Estimate of $5.318 billion. Improvement in sales volumes and higher selling prices were offset by foreign currency headwinds, lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions.

Excluding the aforementioned headwinds, organic sales grew 4% from the prior-year quarter, which includes a 12% increase in K-C International segment sales.

Adjusted operating profit (excluding costs for the pulp and tissue restructuring and European strategic changes) grew $3 million to $853 million in the first quarter. This reflects an increase in organic sales, lower administrative costs, $70 million of cost savings from the restructuring program and $10 million of savings from pulp and tissue restructuring actions. However, input costs increased $65 million and unfavorable currency reduced operating profit by $30 million in the quarter.

Segment Details

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

Sales declined 1% on a year-over-year basis to $2.4 billion in the quarter due to lower sales as a result of European strategic changes and unfavorable currencies. However, organic sales volume increased 6% and net selling prices increased 1% in the quarter. Only K-C International witnessed positive sales growth. Sales in North America were flat while sales in Europe declined in the quarter.

Segment operating profit surged 4% on a year-over-year basis to $457 million in the quarter, benefiting from organic sales growth and cost savings, partially offset by unfavorable currency rates, input cost inflation and higher manufacturing-related costs.

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

Segment sales declined 2% to $1.7 billion in the first quarter due to the negative impact of currencies, lost sales and restructuring actions, which offset the higher product mix and increase in net selling prices. Both Europe and North America witnessed decline in sales, while sales in K-C International improved in the quarter.

Segment operating profit declined 1% to $257 million due to input cost inflation and higher other manufacturing costs offsetting the benefits of organic sales growth and cost savings.

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 increased 1% on a year-over-year basis to $0.8 billion in first quarter 2014 owing to positive sales volumes and higher selling prices. However, these were offset by unfavorable currency rates. Except North America, regions of Europe and K-C International witnessed increase in sales.

Higher marketing spending, unfavorable currency and higher input costs led to a decline of 5% in segment operating profit to $136 million. However, these were offset by organic sales and cost savings.

Health Care: The segment consists of disposable health care products.

Sales were flat at $0.4 billion in first quarter 2014 as improved sales volume was offset by unfavorable currency rates, decline in selling prices and unfavorable product mix. Medical device volumes were up double-digits, while surgical and infection prevention volumes were down low-single digits.

Operating profit was $72 million, up 64% year over year, driven by lower marketing, research and general spending, input cost deflation and cost savings.

Strategic Update

As announced in Oct 2012, the company agreed to dissolve the diaper segment of Western and Central Europe, except the Italian market. The company has also streamlined its manufacturing facilities in Europe, which resulted in restructuring costs of $5 million after tax in the first quarter of 2014. In conjunction with European strategic changes, Kimberly Clark continues to expect restructuring costs towards the higher end of the range of $300 to $350 million after-tax through 2014.

Guidance for Full Year 2014

Kimberly-Clark has re-affirmed its prior guidance for adjusted earnings for fiscal 2014. The company continues to expect adjusted earnings in the range of $6.00-$6.20 for 2014, an increase of 4% to 7% from 2013 levels.

Our Recommendation

We appreciate the company's strong brand portfolio and an enhanced innovation and cost savings program, which helped it to offset higher input costs and unfavorable currency headwinds in the first quarter of 2014. However, flat sales signal weakness in the overall consumer spending environment. Slow recovery of the U.S. economy is denting Kimberly-Clark's sales.

The consumer staples sector has been generally weak over the past few quarters due to limited spending that emanated from slow job growth, high interest rates and tightened credit availability. The company also remains exposed to unfavorable foreign currency translations as it has a considerable international presence. The persistently sluggish economic conditions in Europe also create an overhang. Kimberly-Clark holds a Zacks Rank #3 (Hold).

Better-ranked stocks in the consumer staples sector include McCormick & Company, Inc. MKC, Treehouse Foods, Inc. THS and Supervalu Inc. SVU. All these stocks sport a Zacks Rank #2 (Buy).