Consumer products giant Kimberly-Clark Corporation (KMB - Analyst Report) posted adjusted earnings of $1.61 per share in the third quarter of 2014. Earnings exceeded the Zacks Consensus Estimate of $1.54 by 4.5% and grew 11.8% from the year-ago figure of $1.44 per share. Earnings were boosted by organic sales growth, cost savings and lower share count owing to share buybacks, which made up for increased input costs, currency headwinds, higher tax rate and lower net income from equity companies.

Kimberly-Clark Corporation - Earnings Surprise | FindTheBest

Quarter in Detail

The company reported sales of $5.44 billion in the third quarter. Sales were up 3.4% from the prior-year quarter and were ahead of the Zacks Consensus Estimate of $5.38 billion by 1.1%. Improvement in sales volumes and higher selling prices offset foreign currency headwinds and lost sales in conjunction with European strategic changes.

Excluding the aforementioned headwinds, organic sales grew 4% from the prior-year quarter, which includes a 10% increase in K-C International segment sales.

Adjusted operating profit (excluding costs for the company's potential spin-off of its health care business, which is scheduled to be complete on Oct 31, 2014 and European strategic changes) grew 15% to $948 million in the third quarter. This reflects an increase in organic sales and $100 million of cost savings from the FORCE (Focused On Reducing Costs Everywhere) program. However, input costs increased $55 million in the quarter. Total marketing, research and general expenses were down slightly in the reported quarter, while advertising spending increased $10 million.

Segment Details

Personal Care Products: The segment includes products like disposable diapers, training/ youth/swim pants; baby wipes; feminine and incontinence care products.

Sales increased 4% on a year-over-year basis to $2.5 billion in the quarter owing to slight improvement in product mix, organic sales volume growth of 2% and 3% increase in net selling prices. However, sales were hurt as a result of European strategic changes, unfavorable product mix and unfavorable currencies. K-C International witnessed positive sales growth in the quarter, while sales in Europe and North America declined in the quarter.

Segment operating profit surged 13% on a year-over-year basis to $483 million in the quarter, benefiting from organic sales growth and cost savings, partially offset by unfavorable currency rates and input cost inflation.

Consumer Tissue: The segment includes bathroom tissue, paper towels, napkins and related products for household use.

Segment sales increased 4% to $1.7 billion in the third quarter on the back of higher sales volume and increase in net selling prices. Currency was also favorable by 1%. However, product mix had an unfavorable impact of 1% in the reported quarter. All the three regions of North America, Europe and K-C International witnessed improvement in the quarter.

Segment operating profit climbed 22% to $285 million owing to benefits of organic sales growth and cost savings, which made up for input cost inflation.

K-C Professional (KCP) & Other: The segment consists of facial and bathroom tissue, paper towels, napkins, wipers and a range of safety products.

Segment sales increased 4% on a year-over-year basis to $0.9 billion in the third quarter of 2014 owing to positive sales volumes and favorable currency. Except North America, regions of Europe and K-C International witnessed an increase in sales.

Organic sales growth, cost savings and lower manufacturing-related costs led to an increase of 6% in segment operating profit to $165 million.

Health Care: The segment consists of disposable health care products.

Sales declined 3% to $0.4 billion in third quarter of 2014 due to lower net selling prices. Both medical device volumes and surgical and infection prevention volumes were flat year over year.

Operating profit was $52 million, down 26% year over year, due to lower sales, unfavorable currency and cost inflation.

Strategic Update

As announced in Oct 2012, the company agreed to dissolve the diaper segment of Western and Central Europe, except the Italian market. The company has also streamlined its manufacturing facilities in Europe, which resulted in restructuring costs of $4 million after tax in the second quarter of 2014. In conjunction with European strategic changes, Kimberly Clark continues to expect restructuring costs in the range of $300 to $350 million after-tax through 2014.

2014 Organization Restructuring

During the quarter, the company initiated a restructuring program in order to improve organization efficiency, improve its underlying profitability, increase the company's flexibility to invest in targeted growth initiatives and offset overhead costs stemming from the spin-off of the company's health care business.

The company decided to shed its healthcare business in Nov 2013 to focus on its core consumer and professional brands, optimize its performance and become flexible enough to pursue its own value-creation opportunities. (Read: Kimberly-Clark on Track to Spin-Off Healthcare Business).

The restructuring is expected to be completed by the end of 2016, with total costs anticipated to be $130 to $160 million after tax. However, it will involve employee reductions in the range of 1,100 to 1,300 and will primarily impact salaried employees. It will result in cumulative pre-tax savings in the range of $120 to $140 million by the end of 2017.

Guidance for Full Year 2014

The company has updated its earnings guidance for 2014 to account for the health care spin-off. Adjusted earnings per share are now expected in the range of $5.93 to $6.03 compared with the previous range of $6.00 to $6.15 per share.

Our Recommendation

We appreciate the company’s strong brand portfolio and an enhanced innovation and cost savings program, which helped it to offset higher input costs and unfavorable currency headwinds in the third quarter of 2014. However, the overall consumer staples sector has been weak over the past few quarters due to limited spending that emanated from slow job growth, high interest rates and tightened credit availability. This has also impacted the company’s sales.

Kimberly-Clark holds a Zacks Rank #4 (Sell).

Better-ranked stocks in the consumer staples sector include WD-40 Company (WDFC - Snapshot Report), The Hain Celestial Group, Inc. (HAIN - Analyst Report) and Post Holdings, Inc. (POST - Snapshot Report). All of them sport a Zacks Rank #1 (Strong Buy).

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