Kimberly-Clark Earnings: Tempering Costs Fuel Brand Investments to Support Long-Term Prospects
Kimberly-Clark KMB sought to put to rest questions surrounding the resiliency of consumers with its solid third-quarter marks that included organic sales growth of 5%. The standout was its North American personal care arm (the product segment in aggregate represents about 50% of its business, with North America its largest geographic market, at more than 50% of sales and nearly 80% of operating profits), which chalked up 6% volume growth on a 3% benefit from higher prices and improved mix. And even if industrywide promotions step up to counteract a more precarious consumer spending backdrop, management’s rhetoric suggests a race to the bottom is unlikely given such a path would fail to drive long-term market share gains or support the intangible assets that underpin Kimberly’s narrow moat.
But beyond the top line, Kimberly’s efforts to raise prices, unearth cost savings, and leverage revenue growth management initiatives bolstered the gross margin, up 530 basis points to 35.8% (in excess of the 35% it posted in 2019). However, we think the more muted 210-basis-point bounce in the adjusted operating margin to 15.1% illustrates its commitment to invest behind consumer valued innovation and marketing support to stymie intense competitive pressure, while keeping its brand relevant in the eyes of consumers and retail partners. In this context, the firm is calling for an additional 100 basis points as a percentage of sales to be directed to advertising in fiscal 2023. This aligns with our forecast for 6% of sales to go toward research, development, and marketing on average annually through fiscal 2032.
With just three months left in the year, management again bumped up its outlook for organic sales growth (4%-5% from 3%-5%) and adjusted earnings per share growth (15%-17% from 10%-14%). But we don’t expect a change to our $136 fair value estimate; with the stock down nearly 10% this year, shares look a bit attractive at more than a 10% discount to our intrinsic valuation.
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