Kimberly-Clark Earnings: Gross Margin Bouncing Back, but Inflationary and Competitive Angst Persist

We don’t foresee a material change to our $134 fair value estimate (beyond time value) for Kimberly-Clark KMB after digesting solid second-quarter marks—5% organic sales growth and a 380-basis-point increase in gross margin to 34%. Management bumped up its full-year outlook to 3%-5% organic sales growth (from 2%-4%) and to 10%-14% adjusted EPS growth (from 6%-10%), but the market was less enthusiastic, sending shares down around 4%, leaving the stock in a range we’d consider fairly valued.

We attribute the reaction to rhetoric surrounding its lagging market share and the potential for further trade down given mounting constraints on consumers’ disposable income. However, in the face of these headwinds, we’re encouraged that Kimberly continues to funnel resources to support its brands, with management highlighting the importance of bringing consumer-valued innovation to market. To support its fare, the firm is also calling for an additional 100 basis points as a percentage of sales to be expended on advertising in fiscal 2023. This aligns with our forecast for the firm to direct nearly 2% and 5% on research and development and marketing, respectively, on average annually through fiscal 2032. Although we anticipate promotions could creep up (after being held back by industrywide supply/demand imbalances the past few years), we concur with the firm’s stance that discounting won’t drive long-term market share gains or support the intangible assets that underpin Kimberly’s narrow moat.

While Kimberly incurred a $658 million impairment charge stemming from its 2020 Softex acquisition (a leading Indonesian personal care firm with a complementary portfolio to Kimberly’s), we don’t believe this diminishes the strategic merits of the tie-up (gaining exposure to a market with favorable demographic trends). Rather, we think this reflects the elongated timeline over which growth stands to ramp up after the pandemic. As such, our Exemplary capital allocation rating is unwavering.