Kimberly-Clark: Still Trapped by Inflation


Consumer products maker Kimberly-Clark (NYS: KMB) might need to use some of its tissues after its lousy second-quarter earnings. The company saw a steep decline in its operating profits as a result of higher input costs.

Yup, just let it out.

A look at the numbers
Net income for the second quarter fell 18% year over year, to $408 million. This was primarily due to higher-than-expected raw materials costs and higher effective tax rates. The company's effective tax rate increased to 31.5% from 27.5%, reducing adjusted earnings by $0.07 per share. The grief, however, doesn't end there.

Revenues for the quarter stood at $5.3 billion. Although this marks an 8.3% year-over-year increase, a major chunk -- 5% -- was due to favorable foreign currency rate changes. Organic growth in sales was merely 3%, a combined result of increased volume and pricing.

Cost of goods sold increased by a staggering 15.2% due to inflationary pressures, weighing on margins. A similar outcome was seen in the previous quarter as well and is clearly representative of the commodity inflation we're seeing across the consumer space. The company plans to pass on the burden of higher costs to its customers by raising prices. Competitor Procter & Gamble (NYS: PG) has also raised prices of Pampers diapers and wipes, among other products.

Moreover, year-over-year profits have been flat or shrinking for four consecutive quarters. Earnings per share stood at $1.03, compared to $1.20 last year.

The company's personal care segment accounted for 44% of quarterly revenue and saw a 9.7% dip in operating profit. Kimberly-Clark faces stiff competition from consumer-product maker Johnson & Johnson (NYS: JNJ) in this space.

The Foolish bottom line
Despite efforts to save costs and grow sales, Kimberly-Clark has failed to see profits grow. Moreover, much of this quarter's top-line growth was not due to operational strength activity but because of currency gains. With the company predicting even higher input costs than expected for the rest of the year, this company looks quite troubled.

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At the time thisarticle was published Fool contributor Navjot Kaur does not own any shares of any of the companies mentioned above. The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Kimberly-Clark, Procter & Gamble, and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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