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We reaffirm our Neutral recommendation on Kimberly-Clark Corporation (KMB - Analyst Report) following mixed second-quarter 2013 results.

Why the Reiteration?

Kimberly-Clark posted adjusted earnings of $1.41 per share which surpassed the Zacks Consensus Estimate by 1.4% and the year-ago result by 8.5%. Earnings were boosted by organic sales growth, cost savings, improved other income and lower share count, which made up for increased input costs and higher tax rates.

Organic sales grew 3% from the prior-year quarter, driven by volume growth and strong pricing. Targeted growth initiatives and product innovations aided sales and volume growth in the quarter.

However, the company reported flat year-over-year sales of $5.27 billion in the second quarter. The results slightly lagged the Zacks Consensus Estimate of $5.32 billion. Currency fluctuations and the exit of non-strategic products eroded the company’s sales in the quarter. Further, organic sales growth and cost savings resulted in an increase in operating profit.

Overall, we are encouraged by the company’s leadership position in several consumer product categories including diapers, paper goods, and female personal care. Moreover, Kimberly-Clark focuses on improving its products through innovation in order to remain competitive and drive growth.

Kimberly-Clark is also well-positioned overseas and derives almost half of its revenues from outside U.S. markets. The company has been investing in key emerging markets through K-C International (‘KCI’), which includes businesses in Asia, Latin America, the Middle East, Eastern Europe and Africa, with a particular emphasis on China, Brazil, India and Russia.

We are also optimistic about the company’s restructuring program as it will improve underlying profitability and return on invested capital of its consumer tissue and K-C Professional segments, which have been facing declining profits for many years.

Further, management’s initiatives to control costs through its FORCE program bode well for the future operating performance. The company’s divestiture of some low-margin businesses in certain markets, mostly in the consumer tissue segment will also help the company to utilize its resources in more promising markets.

However, the company’s decelerated sales growth in the healthcare segment over the past four quarters is raising concerns. In addition, lower consumer spending pattern due to an adverse macro-economic environment, unfavorable currency and higher input costs remain headwinds.

Kimberly-Clark holds a Zacks Rank #3 (Hold). Other favorable stocks in the consumer staples sector include Pinnacle Foods Inc. (PF - Snapshot Report), Dole Food Co. Inc and Boulder Foods Inc (BDBD - Snapshot Report). While Pinnacle Foods carries a Zacks Rank #1 (Strong Buy), Dole Food and Boulder Foods carry a Zacks Rank #2 (Buy).

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