) will report earnings on Monday next week. 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
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.
View our detailed analysis for Kimberly-Clark