Analyst Note| Erin Lash, CFA |
The massive inflationary headwinds and category retraction transcribed in the first three months of the year have continued to ring true for Kimberly-Clark. These factors resulted in decreasing sales (down 3% on an organic basis) and profits (with adjusted gross margins off 790 basis points to 31.9% and adjusted operating margins tumbling 760 basis points to 14.3%) in 2021’s second quarter. The pronounced pullback in retailer and consumer inventories in its North American consumer tissue arm (where volumes collapsed 27% against extraordinary 22% growth last year) drove a significant portion of its underperformance in terms of sales and cost leverage. More specifically, excluding this business, sales were up 4% over the same period in fiscal 2020. We still believe Kimberly is prudently focused on investing in innovation and capabilities; we forecast it will expend around 6% of sales, or $1.4 billion annually, on research, development, and marketing (in line with historical levels) to aid its long-term trajectory and support the brand intangible asset that underpins its narrow moat. And in our view, these investments helped bump sales up 3% on a two-year stack.