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Kimberly Clark Q4 Earnings Preview: All Hopes Again On Cost Savings As Currency Headwinds Tighten Their Grip

One of the world's leading diaper manufacturers, Kimberly-Clark ( KMB ) will release its Q4 2016 earnings and full year results on January 24th. It has been a soft year for Kimberly Clark with its year-over-year net revenues falling in all the three quarters reported thus far. This has primarily been because of weak macroeconomic comditions in Latin America (especially Brazil and Argentina), along with a lukewarm performance in the US diaper market. Kimberly Clark reduced its organic sales growth estimates from 3% to 2% and the upper range of its estimated full year EPS by 10 cents in Q3. This has led to a reduction in the consensus estimate for its Q4 earnings as compared to the first three quarters. However the company has been successful in achieving its cost savings targets in the first nine months, which has helped it to bring the trailing twelve month operating cash flow growth from negative in 2015 to positive territory in 2016.

The year 2016 is likely to be another down one for Kimberly Clark as the company will have to post a increase of over 8% in its Q4 net revenues just to match the prior year level for 2015. This is unlikely given tough macro conditions prevalent around the world, especially Latin America.

The factors which are likely to impact Kimberly Clark's earnings in Q4 and the coming quarters are:

  1. Favorable - Innovations and Cost Savings
  2. Unfavorable - Rise In Competition and Strengthening Dollar

See our complete analysis for Kimberly-Clark here

All Hopes On Innovations & Cost Savings

  • In the Q3 2016 earnings call, Kimberly Clark stated that it benefited from innovations in China, Brazil and the US, and announced that it will bring in further innovations in Q4 and the coming quarters. This is likely to act as cushion against its declining market share in the diaper and consumer tissue market.
  • In an effort to go digital, the company will host its K-challenge where it is inviting open source innovations from entrepreneurs and startups to cater to its digital savvy customers.
  • Apart from this, Kimberly Clark's cost saving initiative FORCE (Focused On Reducing Costs Everywhere) is well on track by contributing $295 million to the cost savings in the first nine months of 2016. The company is planning to reach the upper range of its cost savings target for 2016, i.e $400 million. The benefits of this are likely to trickle down to the bottom-line again, similar to what happened in the first three quarters.

Competition And Currency Headwinds To Continue To Haunt Kimberly Clark

  • Kimberly Clark's primary competitor Procter and Gamble has been posing a threat to Kimberly Clark's market share, especially in the US. Due to competition from P&G and the Japanese diaper brands, Kimberly Clark had to cut its prices in China to maintain its organic growth. This is despite the fact that China is considered a stronghold for Kimberly Clark. (See: How Procter & Gamble And Kimberly Clark Compete In Diaper Battlefield )
  • Moreover, P&G has been proactive in coming up with new products in the diaper market. For instance, in an effort to target a new market, P&G launched Pampers' Swaddlers diapers for premature babies in September 2016. This could have had a minor dent on Kimberly Clark's Q4 performance in the US diaper market, where it had already experienced a low single digit volume decline in Q3.
  • Currency too has not been favorable in Q4 as the U.S. dollar index strengthened by over 7% during that period led by optimism regarding the US economy after elections.
  • Also, according to the data by Consumer Metrics Institute, the 90 day trailing consumer demand index in the US had also weakened by over 6% during that period, which can affect the volumes and the already suffering top-line of the company.

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

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

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