Consumer products giant Kimberly-Clark Corporation (KMB) posted adjusted earnings of $1.49 per share in the second quarter of 2014. Earnings were in line with the Zacks Consensus Estimate and grew 5.7% from the year-ago figure of $1.41 per share. Earnings were boosted by organic sales growth, cost savings and a lower share count owing to share buybacks, which made up for increased input costs, currency headwinds and lower net income from equity companies.
Quarter in Detail
The company reported sales of $5.343 billion in the second quarter. Sales were up 1% from the prior-year quarter and were slightly ahead of the Zacks Consensus Estimate of $5.321 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 5% from the prior-year quarter, which includes a 10% increase in K-C International segment sales.
Adjusted operating profit (excluding costs for the company's potential spin-off of its health care business, which is expected to be complete in Oct 2014 and European strategic changes) grew 5% to $860 million in the second quarter. This reflects an increase in organic sales, $75 million of cost savings from the FORCE (Focused On Reducing Costs Everywhere) program and $10 million of savings from pulp and tissue restructuring actions. However, input costs increased $60 million and unfavorable currency reduced operating profit by $20 million in the quarter. Total marketing, research and general expenses were also up slightly in the reported 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 increased 2% on a year-over-year basis to $2.4 billion in the quarter owing to organic sales volume growth of 5% and 3% increase in net selling prices. However, sales were hurt as a result of European strategic changes, unfavorable product mix and unfavorable currencies. Both K-C International and North America witnessed positive sales growth. Sales in Europe declined in the quarter.
Segment operating profit surged 5% on a year-over-year basis to $453 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 increased 1% to $1.6 billion in the second quarter on the back of higher sales volume and increase in net selling prices. However, both European strategic changes and pulp and tissue restructuring actions reduced sales by 2%. Product mix also had an unfavorable impact of 1% in the reported quarter. Both Europe and K-C International witnessed decline in sales, while sales in North America improved in the quarter.
Segment operating profit climbed 9% to $240 million owing to benefits of organic sales growth and cost savings, which made up for input cost inflation and higher marketing spending.
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 2% on a year-over-year basis to $0.9 billion in second quarter 2014 owing to positive sales volumes. However, these were offset by unfavorable currency rates. Except North America, regions of Europe and K-C International witnessed increase in sales.
Unfavorable currency and higher input costs led to a decline of 4% in segment operating profit to $154 million. However, these were offset by organic sales and cost savings.
Health Care:The segment consists of disposable health care products.
Sales declined 1% to $0.4 billion in first quarter 2014 due to currency headwinds and unfavorable product mix. Both medical device volumes and surgical and infection prevention volumes were flat year over year.
Operating profit was $63 million, up 17% year over year, driven by lower marketing, research and general spending 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 $4 million after tax in the second quarter of 2014. In conjunction with European strategic changes, Kimberly Clark continues to expect restructuring costs in the range of $300 to $350 million after-tax through 2014. The impacted businesses previously generated annual net sales of approximately $0.5 billion and negligible operating profit.
Guidance for Full Year 2014 Narrowed
Kimberly-Clark has narrowed its guidance for full year 2014 adjusted earnings. The company now expects adjusted earnings in the range of $6.00 – $6.15 per share, compared with the prior guidance range of $6.00-$6.20 for 2014.
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 second quarter of 2014. However, almost 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 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 Treehouse Foods, Inc. (THS), Newell Rubbermaid Inc. (NWL) and Pinnacle Foods, Inc. (PF). While TreeHouse sports a Zacks Rank #1 (Strong Buy), Newell and Pinnacle hold a Zacks Rank #2 (Buy).
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