Household products company Kimberly-Clark (NYSE:KMB) fell short of analysts' expectations in Q3 FY2023, with revenue up 1.6% year on year to $5.1 billion. Turning to EPS, Kimberly-Clark made a non-GAAP profit of $1.74 per share, improving from its profit of $1.40 per share in the same quarter last year.
Kimberly-Clark (KMB) Q3 FY2023 Highlights:
- Revenue: $5.1 billion vs analyst estimates of $5.2 billion (0.6% miss)
- EPS (non-GAAP): $1.74 vs analyst estimates of $1.59 (9.1% beat)
- Free Cash Flow of $767 million, up 28% from the previous quarter
- Gross Margin (GAAP): 35.8%, up from 30.5% in the same quarter last year
- Organic Revenue was up 5% year on year
- Sales Volumes were down 1% year on year
Originally founded as a Wisconsin paper mill in 1872, Kimberly-Clark (NYSE:KMB) is now a household products powerhouse known for personal care and tissue products.
Huggies, Pull-Ups, Kleenex, Scott, and Depends are some of the company’s iconic brands in baby care, tissue and paper products, and adult hygiene. Kimberly-Clark also has a robust professional business that sells products such as paper towels to large enterprises and business customers.
Kimberly-Clark uniquely serves customers throughout their entire lives. From the moment they’re born, infants and babies rely on the company’s diapers and pull-ups. Children and adults alike are consumers of Kimberly-Clark’s tissues, toilet paper, and paper towels. In their advanced age, many older folks are users of the company’s adult diapers. No matter their age, core customers want cost-effective products, although many are willing to pay a reasonable premium to buy established brands rather than lesser-known or private-label brands.
Kimberly-Clark products are almost ubiquitous. Grocery stores, mass merchandise retailers, drug stores, and specialty retailers typically all sell the company’s products. Given Kimberly-Clark’s scale in its categories and traffic-driving brands, the company often enjoys advantaged placement on retailer shelves.
Household Products
Household products companies engage in the manufacturing, distribution, and sale of goods that maintain and enhance the home environment. This includes cleaning supplies, home improvement tools, kitchenware, small appliances, and home decor items. Companies within this sector must focus on product quality, innovation, and cost efficiency to remain competitive. Household products stocks are generally stable investments, as many of the industry's products are essential for a comfortable and functional living space. Recently, there's been a growing emphasis on eco-friendly and sustainable offerings, reflecting the evolving consumer preferences for environmentally conscious options.
Competitors that offer a wide range of household and personal care products include Proctor & Gamble (NYSE:PG), Unilever (LSE:ULVR), and Church & Dwight (NYSE:CHD).Sales Growth
Kimberly-Clark is one of the most widely recognized consumer staples companies in the world. Its influence over consumers gives it extremely high negotiating leverage with distributors, enabling it to pick and choose where it sells its products (a luxury many don't have).
As you can see below, the company's annualized revenue growth rate of 2.6% over the last three years was mediocre as consumers bought less of its products. We'll explore what this means in the "Volume Growth" section.
This quarter, Kimberly-Clark's revenue grew 1.6% year on year to $5.1 billion, falling short of Wall Street's estimates. Looking ahead, analysts expect revenue to remain flat over the next 12 months.
Volume Growth
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
To analyze whether Kimberly-Clark generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.
Over the last two years, Kimberly-Clark's average quarterly sales volumes have shrunk by 2.3%. This decrease isn't ideal as the quantity demanded for consumer staples products is typically stable. Luckily, Kimberly-Clark was able to offset fewer customers purchasing its products by charging higher prices, enabling it to generate 6.1% average organic revenue growth. We hope the company can grow its volumes soon, however, as consistent price increases (on top of inflation) aren't sustainable over the long term unless the business is really really special. 
In Kimberly-Clark's Q3 2023, year on year sales volumes were flat. This result was a well-appreciated turnaround from the 5% year-on-year decline it posted 12 months ago, showing the company is heading in the right direction.
Gross Margin & Pricing Power
All else equal, we prefer higher gross margins. They make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
This quarter, Kimberly-Clark's gross profit margin was 35.8%. up 5.3 percentage points year on year. That means for every $1 in revenue, $0.64 went towards paying for raw materials, production of goods, and distribution expenses. 
Kimberly-Clark's unit economics are higher than the typical consumer staples company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see above, it's averaged a decent 32% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 12.3% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).
Operating Margin
Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
In Q3, Kimberly-Clark generated an operating profit margin of 15.1%, up 1.9 percentage points year on year. This increase was encouraging, and we can infer Kimberly-Clark had stronger pricing power and lower raw materials/transportation costs because its gross margin expanded more than its operating margin.
Zooming out, Kimberly-Clark has exercised operational efficiency over the last eight quarters. The company has demonstrated it can be one of the more profitable businesses in the consumer staples sector, boasting an average operating margin of 13.7%. On top of that, its margin has risen by 2.1 percentage points on average each year, showing the company is improving its fundamentals. EPS
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q3, Kimberly-Clark reported EPS at $1.74, up from $1.40 in the same quarter a year ago. This print beat Wall Street's estimates by 9.1%.
Between FY2020 and FY2023, Kimberly-Clark's adjusted diluted EPS dropped 50.7%, translating into 12.7% average annual declines. We tend to steer our readers away from companies with multiple years of falling EPS, especially in the consumer staples sector, where consistently negative earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 10% year-on-year increase in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Kimberly-Clark's free cash flow came in at $767 million in Q3, up 30.2% year on year. This result represents a 14.9% margin.
Over the last two years, Kimberly-Clark has shown strong cash profitability, giving it an edge over its competitors and the option to reinvest or return capital to investors while keeping cash on hand for emergencies. The company's free cash flow margin has averaged 10.9%, quite impressive for a consumer staples business. Furthermore, its margin has averaged year-on-year increases of 3.4 percentage points. This likely pleases the company's investors.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Over the last five years, Kimberly-Clark had a strong competitive position and its management team did a wonderful job investing in profitable growth initiatives. Its five-year average ROIC was 34.6%, placing it among the best consumer staples companies.
Key Takeaways from Kimberly-Clark's Q3 Results
Sporting a market capitalization of $40.8 billion, more than $814 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Kimberly-Clark is attractively positioned to invest in growth.
We enjoyed seeing Kimberly-Clark exceed analysts' gross margin expectations this quarter. That stood out as a positive in these results. On the other hand, its EPS missed analysts' expectations and its operating margin missed Wall Street's estimates. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $121.45 per share.
Is Now The Time?
Kimberly-Clark may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We have other favorites, but we understand the arguments that Kimberly-Clark isn't a bad business. Although its mediocre sales volumes have been a headwind, its stellar ROIC suggests it has been a well-run company historically.
Kimberly-Clark's price-to-earnings ratio based on the next 12 months is 17.7x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Kimberly-Clark, it seems to be trading at a reasonable price.
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