Kimberly-Clark Earnings Preview: Profitability in Focus

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Kimberly-Clark (NYSE:KMB) will report earnings on Monday. In this announcement we will look for cost pressures from inflation that will weigh on gross margins with despite various cost cutting initiatives the company has started. We discussed this and its Q1 results in our note Inflation Squeezes Margins At Kimberly-Clark. We highlight that profit margins are one area of concern while we look for color on its pricing and cost cutting plans that could potentially alleviate some of these pressures.

We value Kimberly-Clark with a $65.80 Trefis price estimate of its stock, which is inline with its current market price.

Why are operating margins our prime concern?

While the first quarter sales of $5 billion grew by 4% year over year (yoy), 2% of which was due to favorable foreign exchange rate effects — a more serious concern was the corresponding 18% drop in operating income from $644 million in Q1 2010 to $544 million in Q1 2011.

While Kimberly-Clark had benefited from sales growth and dedicated cost savings of $60 million, these were far outpaced by inflation in key cost inputs to the tune of $195 million over 2010 levels. The company also curtailed production to keep a check on inventory levels, which also impacted operating income adversely by an additional $25 million.

What do we expect to see in Q2

1. Price hikes to come to the rescue

In March, Kimberly-Clark had proposed raising prices in North America in the range of 3%- 7% in baby care and around 7% for consumer tissues to be impacted in the second and third quarters of the current fiscal. See Price Hikes Won’t Help Kimberly-Clark’s Stock.

While a quarter is too short to determine the success of price increases in consumer goods since it normally takes a while to ascertain the resulting impact on market shares, given that these were cost-inflation induced price increases affecting the industry as a whole, we do not expect an adverse impact on Kimberly-Clark’s volumes in particular.

2. Impact of restructuring programs

Corporate overhead expenses in the garb of restructuring programs have strained Kimberly-Clark’s cash balance for some time. We are optimistic that these cost-cutting and organizational restructuring initiatives will translate to more efficiency in operations and improved EBITDA margins in the future.

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