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Kimberly-Clark Beat 1Q18 Estimates: No Respite for Stock

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Challenges persist

Kimberly-Clark (KMB) reported better-than-expected 1Q18 results on Monday, April 23, 2018. The company’s top-line and bottom-line results surpassed analysts’ expectations. However, investors didn’t care much, and the company’s stock fell about 1.5% as persisting challenges, especially on the margins front, remained a drag.

Kimberly-Clark’s gross margin fell 310 basis points as significant inflation in commodities and lower pricing continue to dent the profitability of the company.

Another key deterrent is growing competition from local players, primarily in China. Also, low birth rates in South Korea, brand investments to support volumes, and tight inventory management by retailers further hurt the company’s financials.

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Going forward, investors remain concerned about the margins of the consumer packaged goods (or CPG) manufacturers. Significant inflation in raw materials and transportation costs and price competition are likely to act as a deterrent in the near future. Moreover, brand reinvestment needs and growing threats from private label players could further remain a drag.

Kimberly-Clark’s stock performance disappoints

The graph shows that stock prices of CPG companies are trading in the red on a YTD (year-to-date) basis as of April 23, 2018. Kimberly-Clark’s stock has fallen about 18.3% on a YTD basis as margin headwinds and increased competition are taking a toll on its financials.

The company’s peers are no better off. Procter & Gamble (PG), Clorox (CLX), Colgate-Palmolive (CL), and Church & Dwight have fallen 20.5%, 22.8%, 12.0%, and 9.5%, respectively. The underperformance of these companies is one of the primary reasons behind the 11.4% YTD decline in the Consumer Staples Select Sect. SPDR ETF (XLP).

The Consumer Staples Select Sect. SPDR ETF invests about 11.3% of its holdings in Procter & Gamble, 2.3% in Kimberly-Clark, ~1% in Clorox, and 0.7% in Church & Dwight. Meanwhile, the S&P 500 Index is roughly flat on a YTD basis.

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