Consumer products stocks are often viewed as more stable than
other stocks. Indeed,
and its peers sell products that are used every day in
millions of households across the world. This results in fairly
However, it's a mistake to think consumer staples stocks,
Kimberly-Clark included, are risk-free. Any stock has its fair
share of risks. Even though Kimberly-Clark has some well-known
brands, including Kleenex, Scott, and Huggies, it's battling a
fair share of headwinds right now.
Here are three reasons why Kimberly-Clark shares could
underperform going forward.
Rising input costs
Last quarter, Kimberly-Clark's diluted earnings per share
declined by approximately 1%. Management attributed this
primarily to rising input costs. Inflation is hitting
Kimberly-Clark fairly hard. Input costs increased by $60 million
last quarter, of which $15 million was due to higher fiber costs
and $45 million was due to higher costs of raw materials other
In response, management has embarked on a cost-savings program
called FORCE, which stands for Focus On Reducing Costs
Everywhere. This helped shave $75 million off operating costs in
the last quarter, but there's only so much that can be done to
Should inflation persist, Kimberly-Clark will have trouble
posting earnings growth for the remainder of this year, and that
could adversely impact its stock price.
A strengthening U.S. dollar
Kimberly-Clark's sales are suffering in part because of the
strengthening U.S. dollar. Companies that do business across the
world, as Kimberly-Clark does, see net sales drop when the U.S.
dollar increases in value versus other currencies. In these
instances, sales generated in other parts of the world are
converted into fewer U.S. dollars.
This is why net sales are fairly unimpressive across the
industry at the moment. For example, competitor
Procter & Gamble
posted a 1% sales decline last quarter. Fiscal 2014 sales
increased just 1%, and management attributed a negative
2-percentage-point impact to foreign exchange.
For its part, Kimberly-Clark's net sales increased 1% last
quarter. Organic sales -- for which Kimberly-Clark excluded
foreign-currency impacts and lower sales as a result of European
strategic changes and pulp and tissue restructuring actions --
increased a more satisfactory 5%, but the strengthening U.S.
dollar is nevertheless a headwind.
Competition from cheaper alternatives
Complicating matters even further is that Kimberly-Clark faces
stiff competition from lower-end competitors. Kimberly-Clark's
core brands, which include Kleenex and Huggies, are premium
brands that command relatively high pricing.
On the lower-end, generics and cheaper competitors can
undercut Kimberly-Clark on pricing. This was one of the reasons
why Kimberly-Clark management narrowed earnings guidance for the
remainder of the year.
Kimberly-Clark is more exposed to the health of the consumer
than companies that offer cheaper brands. Kimberly-Clark
specifically cited the difficult environment in its last earnings
report, which means it's under pressure from consumers opting for
lower-priced items if the economy stagnates.
The Foolish takeaway
Kimberly-Clark is a highly profitable company and offers a 3%
dividend yield at its current share price, which may be
attractive to income investors. At the same time, investors
should be concerned about growth and total return potential.
Kimberly-Clark is under pressure from rising input costs, the
continued strengthening of the U.S. dollar, and cheaper
alternatives on store shelves. Even though management projects 5%
earnings growth this year, Kimberly-Clark has produced just 1%
growth in diluted earnings per share over the first half of the
Unless these headwinds subside, it will be difficult for
management to meet its goals, and that might not sit well with
investors. Kimberly-Clark's dividend yield will be of little
consolation if it doesn't get better control of its raw materials
costs, the U.S. dollar keeps strengthening, and if brands with
lower price-points steal market share in a difficult economic
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3 Reasons Kimberly-Clark Stock Could Fall
originally appeared on Fool.com.
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