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Can Kimberly-Clark's Saving Plans Pare Input Cost Woes?

Zacks Equity Research

Kimberly-Clark Corporation KMB is treading on a rough path, thanks to rising input costs and softness in the K-C Professional unit. Nevertheless, the company has maintained its steadiness on the back of prudent initiatives that include focus on boosting savings, brand growth and inducing efficiency in supply chain.  Let’s take a closer look.

Efforts to Boost Efficiency and Brands Bode Well

Kimberly-Clark is progressing well with the 2018 Global Restructuring Program, which is one of its biggest restructuring initiatives. The plan focuses on enhancing the company’s underlying profitability by simplifying supply chain and manufacturing structures. During the second quarter of 2019, the company generated savings of nearly $20 million from this program. Management continues to expect pre-tax savings in the range of $500-$550 million from this program by the end of 2021. As part of this initiative, the company plans to sell or exit some low-margin businesses that contribute around 1% to net sales and are concentrated in the consumer tissue unit.

Kimberly-Clark is also aggressively cutting costs and enhancing supply-chain productivity through the Focus on Reducing Costs Everywhere or FORCE program. During the second quarter, the company generated savings worth $70 million from this program. Apart from these, Kimberly-Clark is committed to its three key strategic growth pillars. These include focus on improving core business in developed markets, boost brands in the Personal Care segment in developing and emerging markets as well as enhance digital and e-commerce capacities. Speaking of brand growth efforts, the company regularly undertakes innovation to bolster brand positions and market share in the consumer categories such as diapers.

Additionally, the company introduced the K-C Strategy 2022 in January 2019. Through the initiative, the company focuses on generating balanced and sustainable growth to boost shareholders’ value amid a tough environment. In extension, the strategy is aimed to successfully meet the aforementioned goals pertaining to FORCE and Global Restructuring as well as the company’s three main strategic pillars.

Headwinds in the Path

Rising input costs have been troubling Kimberly-Clark. Evidently, higher input costs worth $80 million stemming from greater costs of pulp, raw materials and distribution expense put pressure on adjusted operating profit in second-quarter 2019. Management expects input cost inflation for 2019 in the range of $150-$250 million.

Moreover, the company’s K-C Professional unit has been sluggish. After declining 2% in the first quarter of 2019, segment’s sales dropped 5% in the second quarter. The downside was caused by adverse currency rates and several business exits.

Such headwinds have weighed upon the stock, which declined 2.8% in the past three months compared with the industry’s fall of 11.6%.

Nevertheless, we expect that Kimberly-Clark’s well-chalked saving-boosting endeavors will enable it to overcome cost-related hurdles. Moreover, this Zacks Rank #3 (Hold) company’s efforts to boost brands in key markets are encouraging.    

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