Price Hikes Won't Help Kimberly-Clark's Stock

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Kimberly-Clark ( KMB ) recently hiked prices for several of its popular global brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend holds No.1 or No.2 market share positions in over 80 of the 150 countries in which it sells its personal care products while touching the lives of nearly a quarter of the world's population. Kimberly-Clark makes paper and pulp based consumer products and competes with companies such as Procter & Gamble ( PG ), Unilever ( UL ) and Colgate-Palmolive ( CL ) in other consumer products.

Kimberly-Clark is proposing to raise prices of baby care products in the range of 3-7% and around 7% for consumer tissues.

The risk associated with raising prices is that it could driver consumers away to competition. This is particularly evident in products such as diapers and tissues where this is not much product differentiation and consumers are price elastic. Manufacturers often absorb the cost increases until the industry as a whole has repriced in order to sustain market share.

Since Kimberly-Clark has only issued a tentative timeline for its price increases, we expect to see how competition responds before making gross margin assumptions.

Other Levers Kimberly-Clark Can Use

Kimberly-Clark could improve margins in the medium-term by seeking operational efficiencies and emphasizing premium products that can demand a higher price point. While focusing on innovation might require investment in the near-term, this strategy could have a more sustainable impact in terms of market share gains and higher prices of its products in general.

One example of this is Kimberly's Pulp and Paper Restructuring Program (2011-12) where the company plans to sell off or close down five to six of its manufacturing facilities that currently make about 8% of the 2.5 million tons of pulp that it uses a year. This aims at restoring the profitability of its $6.5 billion worth (in sales) consumer tissues business, which makes items such as toilet paper, paper towels and tissues.

Stock Price Impact

While the recently announced price increases are expected to have negligible impact on Kimberly-Clark's stock, we have already incorporated the impact of the above restructuring program to improve operating margins, in our $69 Trefis process estimate of Kimberly-Clark's stock .

You can see a detailed analysis of our $69 Trefis price estimate of Kimberly-Clark's stock here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CL , KFT , KMB , PG , UL

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