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Why Kimberly-Clark’s Margins Are Expected to Decline

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Cost headwinds to hurt margins

Kimberly-Clark’s (KMB) profit margins remained weak in the first nine months of 2018, and the trend is likely to continue as challenges persist, at least in the near term. Kimberly-Clark’s management expects inflation in commodities, including pulp and other raw materials, to continue to hurt its gross margins despite the benefits from a favorable mix, higher pricing, and cost savings. Also, adverse currency rates could hurt.

Weak gross margins are likely to hurt operating margins during the fourth quarter. Kimberly-Clark expects its adjusted operating profit to decline 5% or more in 2018.

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Sluggish performance so far this year

The graph above shows that Kimberly-Clark’s profit margins have remained weak in the first three quarters of 2018. The company’s adjusted gross margin declined by 310 basis points, 270 basis points, and 250 basis points during the first, second, and third quarters, respectively. Inflation in pulp and other raw materials costs more than offset the benefits from cost savings.

The company’s peers, including Procter & Gamble (PG), Colgate-Palmolive (CL), Clorox (CLX), and Church & Dwight (CHD), have also disappointed investors with their weak gross margins so far this year.

The decline in the gross margin rate and adverse currency affected Kimberly-Clark’s operating margin, which fell by 140 basis points, 100 basis points, and 120 basis points in the first, second, and third quarters of 2018, respectively.

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