Kimberly-Clark

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Kimberly-Clark is a global personal care company known for its household brands, particularly in the diaper, feminine care, and tissue categories.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Kimberly-Clark’s moat is rated 3 out of 5, reflecting a blend of brand strength and distribution advantages, balanced against the competitive pressures and limited innovation in its core markets.

Moat Analysis

  • Brand Strength (Moderate): Kimberly-Clark boasts a portfolio of well-known brands, such as Kleenex, Huggies, and Kotex, which enjoy significant brand loyalty and customer recognition. However, these brands are not entirely immune to competition from private-label and value brands, and they have faced changing preferences with increased competition from smaller companies. This indicates a moderate moat based on brands.
  • Distribution Network (Moderate): The company maintains a global distribution network that allows it to reach consumers effectively. The vastness of its supply chain enables KMB to bring products to customers reliably. However, large retail chains have significant negotiating power with distributors.

Risks to the Moat

  • Commoditization Risk: Many of Kimberly-Clark’s products, particularly tissue and paper-based goods, face commoditization and competition from private label brands. This can result in a decline in price and margin, limiting KMB’s ability to generate excess returns over peers.
  • Changing Consumer Preferences: Preferences in personal care are subject to shifts. If Kimberly-Clark fails to keep up with evolving preferences, or if competitors launch innovative products before KMB, the company may lose market share to rivals.
  • Global Macroeconomic Factors: KMB has significant exposure to foreign currencies, with recent issues being an example of this. Unstable currency environments can lead to swings in the company’s revenue, or affect profitability. Also, geopolitical and macroeconomic factors (high inflation, unemployment) can put pressure on consumers.
  • Raw Material Cost Volatility: Kimberly-Clark is subject to volatile raw material costs, such as pulp, oil, and natural gas, that have caused price increases and may continue to pressure their bottom line.

Business Resilience

Kimberly-Clark’s resilience stems primarily from its focus on defensive product categories (personal care products). Demand for these products remains relatively stable even during recessions. Moreover, its strong brands and entrenched customer relationships aid its ability to withstand adverse economic conditions, though it has shown that high inflation and supply chain issues have pushed down margins, and these are likely to continue to be a pain point for the foreseeable future. The company has strong brand names with good customer loyalty, even though they have no moat, the business still does a good job, so the long run outlook for its main product lines is positive.

Business Overview

  • Revenues Distribution: Kimberly-Clark operates through three major segments: Personal Care, Consumer Tissue, and K-C Professional.
    • Personal Care: This segment includes disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and other related products.
    • Consumer Tissue: This segment includes products such as facial tissue, bathroom tissue, paper towels, napkins, and related products for household use.
    • K-C Professional: This segment includes a wide range of products for the workplace, such as wipers, disposable safety and protective clothing, and other specialty products.

  • Industry Trends: In personal care, consumers are seeking increasingly higher-quality products that provide superior comfort and leakage protection. There is also an emphasis on the use of natural and sustainable products. In consumer tissue, customers are demanding premium products that offer higher levels of softness and strength, as well as value-oriented and environmentally friendly options. For professional customers, there is an increased focus on hygiene and safety due to the pandemic and an elevated awareness of best practices related to these matters.

  • Margins: Overall, Kimberly-Clark has a moderate margin (as of late) due to high competition and rising costs, and this is an area the management is focused on addressing. For the three months ended September 30, 2024, the net margin was 13.6%, slightly up YoY. But in previous quarters and years, margins have been lower, showing how this can change over time. Operating margin has been stable through the past years with some variations from quarter to quarter depending on different pressures of costs (raw material, labor) and supply chain.

  • Competitive Landscape: KMB faces competition from major multinational corporations such as Procter & Gamble, and Unilever, as well as smaller niche brands and private label brands. In addition, several startups are making their way into the market, thus creating increasing competition for the company.

  • What Makes Kimberly-Clark Different? The company’s differentiation lies primarily in its well-known brands, its long-standing relationships with retailers, its significant distribution network, as well as large-scale and highly automated manufacturing operations. It has tried to emphasize brand loyalty in all of its sectors, trying to get customers to be more loyal to KMB products rather than competitors.

  • Recent Concerns/Controversies: KMB is currently in a period of higher cost pressures (inflation). Furthermore, consumers are choosing to buy cheaper options, thereby reducing demand for premium products in KMB’s range, and this has led to lower profits and margins. On the bright side, they have started their transformation initiatives to streamline their supply chain and improve productivity. These measures are expected to pay off in the coming years. The company has also highlighted the need to stay aligned to the shifting preferences of consumers with continued innovation in new and existing product lines.

Financial Analysis

  • Revenue: The business has historically shown a slow growth in revenue due to mature markets with few high-growth areas. For the first three quarters of 2023, net sales were $15.13 billion, which is a 3.9% YOY increase. The company’s growth is primarily driven by price increases, as it is offsetting the effects of inflationary pressures. Volume is expected to be sluggish for the foreseeable future, with management focusing on getting costs down to stabilize profit.

  • Profitability: Profitability is usually strong, but has taken a hit in recent years. A combination of rising inflation, supply chain disruptions, and increased competition from low cost private label brands have all squeezed KMB’s margins. As the company works to reduce costs, margins are expected to revert to historical levels, though this is hard to guarantee with all the market conditions.

  • Cash Flows: Cash flow is also under pressure due to higher costs, and higher debts, as capital spending will still be needed for some time. If these factors remain, then free cash flows may struggle to return to historical norms.

  • Debt: KMB currently has $8.4 billion of debt. The company uses leverage in capital allocation, to increase shareholder value, and because the business generates predictable and consistent cash flows.

Understandability Rating: 2 / 5

The company’s business model is relatively straightforward—manufacturing, marketing, and selling personal care products. However, understanding the nuances of how its brands compete with a changing market landscape and how they develop new products and cut costs, along with the effects of foreign currencies, makes it more complex. Furthermore, the sheer volume of data to analyze is a key factor in its complexity for the average investor.

Balance Sheet Health: 4 / 5

Kimberly-Clark’s balance sheet is solid. KMB has high amounts of debt but it also has enough cash and assets to meet its financial obligations. Although long term debt is high, it does not pose a major threat as KMB has always had a stable and predictable business with high recurring revenues, and strong brand loyalty.

  • Assets: The company has a strong asset base, mainly composed of property, plant and equipment ($8 billion, which is fairly stable YOY), as well as a significant amount of inventories and receivables.
  • Liabilities: Their liabilities are mainly comprised of current trade payables as well as other non current liabilities (pensions, leases etc), with total liabilities equalling to around $15.5 billion.
  • Equity: KMB has a substantial negative equity value (-$3 Billion) mainly due to high amounts of debt which it uses to benefit shareholder returns through share repurchases, and special dividends.