As of August 15, shares of Kimberly-Clark (KMB) have risen 10.5% since its second-quarter results on July 24. The primary reason for the recovery in the stock price is the anticipated increase in net selling prices. Kimberly-Clark’s management stated during the second-quarter conference call that it plans to increase pricing to offset the pressure on margins from continued inflation in commodity prices, including pulp.
On August 15, Kimberly-Clark announced that it’s increasing the prices for the North American consumer product business. The price increase will range from the mid-to-high single digits and includes products like Huggies diapers, Kleenex facial tissue, and Viva paper towels.
For investors, higher prices are welcome. Commodities have been a significant drag on gross margins in the past several quarters. Higher pulp and other raw material costs had a negative impact of $200 million on Kimberly-Clark’s adjusted gross margin during the second quarter. The adjusted gross margin fell by 270 basis points to 33.4% during the second quarter.
Management stated that inflation in commodities would have a negative impact of $675 million–$775 million in 2018, which is ~$250 million higher than what it projected during the first-quarter conference call.
Besides Kimberly-Clark, other significant households and personal care product manufacturers like Clorox (CLX), Procter & Gamble (PG), and Colgate-Palmolive (CL) are also taking pricing action to offset the negatives stemming from higher raw material prices.
We think that consumer product companies increasing the pricing is a positive step. However, we’re also cautious because higher prices could impact volumes. Retailers are aggressively pushing low-priced and private-label products amid heightened competition.
In the near term, the margins will likely remain subdued. The benefits of higher pricing are expected to support the financials in 2019.