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Consumer products giant Kimberly-Clark Corporation (KMB - Analyst Report) posted third quarter 2013 adjusted earnings of $1.44 per share. Earnings beat the Zacks Consensus Estimate of $1.40 by 2.9% and the year-ago result of $1.34 by 7.5%. Earnings were boosted by organic sales growth, cost savings, favorable tax rates and lower share count, which made up for increased input costs and currency headwinds.

Quarter in Detail

The company reported almost flat sales of $5.26 billion in the third quarter. The results slightly beat the Zacks Consensus Estimate of $5.24 billion. Improvement in sales volumes, higher selling prices and favorable product mix were offset by foreign currency headwinds, lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions.

Excluding the aforementioned headwinds, organic sales grew 5% from the prior-year quarter.

Adjusted operating profit (excluding costs for the pulp and tissue restructuring and European strategic changes) grew 1% to $821 million in the third quarter. This reflects increase in organic sales and $80 million of cost savings from restructuring program. Adjusted operating margin also improved 10 basis points to 15.6% in the third quarter of 2013.

Segment Details

Personal Care Products: The segment includes products like disposable diapers, training/ youth/swim pants; baby wipes; feminine and incontinence care products.

Sales declined 1% on a year-over-year basis to $2.4 billion in the quarter as lower sales volume and unfavorable currencies more than offset the improved product mix and higher selling prices. However, organic sales volume increased 5%. Only K-C International region witnessed positive sales growth. Sales in North America were flat while sales in Europe declined in the quarter.

Segment operating profit declined 2% on a year-over-year basis to $427 million in the quarter due to higher input costs, unfavorable currencies and higher marketing expenses, which mostly offset the benefits from organic sales growth and cost savings.

Consumer Tissue: The segment includes bathroom tissue, paper towels, napkins and related products for household use.

Sales increased 1% to $1.6 billion in the third quarter on the back of growth in organic sales volumes, favorable product mix and increase in net selling prices, which were able to offset the negative impact of currencies, lost sales and restructuring actions. Except Europe, regions of K-C International and North America witnessed improvement in sales driven by product innovation, improved pricing and strong volumes.

Segment operating profit improved 8% to $233 million as organic sales growth, cost savings and lower marketing, research and general expenses were partially offset by input cost inflation and unfavorable currency rates.

K-C Professional (KCP) & Other: The segment consists of facial and bathroom tissue, paper towels, napkins, wipers and a range of safety products.

Sales increased 3% on a year-over-year basis to $0.8 billion in the third quarter 2013 owing to positive sales volumes, improved product mix and higher selling prices. However, these were offset by unfavorable currency rates, lost sales and restructuring actions. Except Europe, regions of North America and K-C International witnessed increase in sales. Sales in Europe were flat in the quarter.

Organic sales and cost savings led to an increase of 8% in segment operating profit to $155 million. However, these were offset by higher manufacturing-related costs and unfavorable currency rates.

Health Care: The segment consists of disposable health care products.

Sales improved 2% from the prior-year quarter to $0.4 billion in third quarter 2013, resulting from improved sales volume and product mix, offset by unfavorable currency rates. Medical device volumes were up high-single digits, while surgical and infection prevention volumes were up slightly in the quarter.

Operating profit was $70 million, up 19% year over year, driven by organic sales growth, reduced marketing, research and general expenses and cost savings.

Strategic Update

The company has dissolved the diaper segment of Western and Central Europe, except the Italian market, which was announced in Oct 2012. The company has also streamlined its manufacturing facilities in Europe, which resulted in restructuring costs of $10 million after tax in the third quarter of 2013. In conjunction with European strategic changes, Kimberly Clark expects to incur restructuring costs at the higher end of the range of $300 to $350 million after-tax through 2014.

Guidance for Full Year 2013

Kimberly-Clark has increased the lower end of its previously provided earnings guidance for 2013. The company now expects adjusted earnings in the range of $5.65-$5.75, compared with the prior range of $5.60-$5.75. Adjusted earnings for 2013 mark a year over year growth of 8% to 10%.

Other than that, the company expects to repurchase shares worth $1.2 billion for 2013. The company expects currency to negatively impact sales by 1% to 2%.

Our Recommendation

We appreciate the company’s strong brand portfolio and an enhanced innovation and cost savings program that has helped it to beat earnings in the third quarter of 2013. However, flat sales signal weakness in the overall consumer spending environment. Slow recovery of the U.S. economy is denting Kimberly-Clark’s sales.

The consumer staples sector has been generally weak over the past few quarters due to limited spending that emanated from slow job growth, high interest rates and tightened credit availability. The company also remains exposed to unfavorable foreign currency translations as it has a considerable international presence. The persistently sluggish economic conditions in Europe also create an overhang. Kimberly-Clark holds a Zacks Rank #4 (Sell).

Other stocks in the consumer staples sector that are better-positioned are Energizer Holdings Inc. (ENR - Analyst Report), Tupperware Brands Corp. (TUP - Snapshot Report) and Green Mountain Coffee Roasters Inc (GMCR - Analyst Report), all of them carrying a Zacks Rank #2 (Buy).

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