Kimberly-Clark ( KMB ) released it Q3'16 earnings on October 24th. The net sales declined by 2.6% due to the ongoing weak economic conditions around the world, especially in Latin America. The fact that even organic sales remained flat pushed the stock down almost 5% in the US session. The only ray of hope for the company could be seen on the margin front as the adjusted operating margin increased by 0.7 percentage points in lieu of successful FORCE (Focused on Cost Savings Everywhere) initiative by the company.
Going forward, the company has lowered down its outlook for the year as it is difficult to predict the end to the slow consumer demand across the world. This combined with absence of sufficient product innovations and growing competition around the world are likely to create further problems for the company, as its dependency on cost savings continue to increase. ( See: Why Is Kimberly Clark Relying Heavily On Cost Savings ).
Price Increases In Latin America Offset By The Opposite Trend In China
In a continuing trend, Latin America saw price increases in the wake of high inflation and production costs in the region. The resulting benefit of price increases on the top line was offset by the simultaneous price decrease in China. Kimberly Clark has been facing tough competition in China and other Asian countries and had to reduce its prices and margins in the region to keep the volumes up. This was evident from the fact that despite an increase in total operating profit, the operating profit outside North America saw a decline of 10% year over year.
FORCE And Commodity Cost Deflation Kept The Bottom Line Strong
The FORCE (Focused On Cost Saving Everywhere) is a cost saving initiative by Kimberly Clark. The program reported record savings of $105 million in Q3 as compared to $95 million in Q1 and Q2. The company has been aiming at around $350 - $400 million savings in FY 2016. It has already reached $290 million figure by the third quarter and is likely to touch the upper end of their savings target by the end of the year. This was supported by a $10 million advantage from the cost deflation of the cellulose fiber which is the primary raw material used in the manufacture of tissues and diapers. Combined, both the factors led to a 60 basis point rise in the adjusted EPS despite a dismal showing at the revenue line.
Slow Product Innovation
In the ever increasing competition within consumer goods market, it is becoming essential for Kimberly Clark to bring in better innovation and improvements in its products. As compared in the article " How Procter & Gamble and Kimberly Clark Compete in Diaper Battlefield? ", it is evident that products of Kimberly Clark's most important segment, i.e Personal Care, are not only priced higher even after price decreases but are also less popular among the masses due to better quality provided from the competitors like P&G. Although there have been some innovations lately in the feminine care and consumer tissue segments, it is yet to reflect any improvements in the top line reported by the company.
Also Kimberly Clark spends around 3.8% of its net sales on advertising, which amounts to under $200 million. Given the fact that it is doing fairly well on the bottom line, the company might need to explore the option to increase its advertising budget to scrap in some lost market share.
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