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Consumer products giant Kimberly-Clark Corporation (KMB - Analyst Report) posted fourth 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 figure of $1.37 by 5.1%. Earnings were boosted by organic sales growth and, cost savings, which made up for increased input costs and currency headwinds.

Quarter in Detail

The company reported almost flat sales of $5.305 billion in the fourth quarter. The results beat the Zacks Consensus Estimate of $5.25 billion by a slight margin. Improvement in sales volumes and higher selling prices 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, which includes an 11% increase in the K-C International segment.

Adjusted operating profit (excluding costs for the pulp and tissue restructuring and European strategic changes) grew 5% to $836 million in the fourth quarter. This reflects an increase in organic sales and $75 million of cost savings from the restructuring program. Unfavorable currency reduced operating profit by $25 million. Adjusted operating margin also improved 80 basis points to 15.8% in the fourth quarter of 2013.

Full-Year 2013 Results

In 2013, Kimberly-Clark delivered adjusted earnings of $5.77 per share. Earnings beat both the Zacks Consensus Estimate of $5.73 per share by 0.7% and the year-ago result of $5.25 by 9.9%. The results also exceeded the company’s guided range of $5.65-$5.75 per share. Earnings were boosted by organic sales growth and cost savings.

The company’s sales were almost flat at $21.2 billion in 2013 and were marginally ahead of the Zacks Consensus Estimate of $21.1 billion. Improvement in sales volumes and higher selling prices were offset by foreign currency headwinds, lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions. Excluding these headwinds, organic sales grew 4% from the prior-year.

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 due to lower sales volume and unfavorable currencies. However, organic sales volume increased 6%. 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 5% on a year-over-year basis to $398 million in the quarter due to higher input costs and unfavorable currencies, 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 were flat at $1.7 billion in the fourth quarter attributable to growth in organic sales volumes, favorable product mix and increase in net selling prices, which offset the negative impact of currencies, lost sales and restructuring actions. Both Europe and North America witnessed decline in sales, while sales in K-C International improved in the quarter.

Segment operating profit improved 17% to $275 million as organic sales growth, cost savings and lower marketing, research and general expenses were partially offset by input cost inflation.

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 fourth quarter 2013 owing to positive sales volumes, improved product mix and higher selling prices. However, these were offset by unfavorable currency rates. 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 $149 million. However, these were offset by higher marketing spending and higher input costs.

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

Sales improved 2% from the prior-year quarter to $0.4 billion in fourth quarter 2013 as improved sales volume was offset by unfavorable currency rates. Medical device volumes were up high-single digits, while surgical and infection prevention volumes were even with the year-ago levels.

Operating profit was $62 million, up 2% year over year, driven by organic sales growth, which was offset by higher marketing, research and general expenses.

Strategic Update

As announced in Oct 2012, the company agreed to dissolve the diaper segment of Western and Central Europe, except the Italian market. The company has also streamlined its manufacturing facilities in Europe, which resulted in restructuring costs of $14 million after tax in the fourth quarter of 2013. In conjunction with European strategic changes, Kimberly Clark expects to incur restructuring costs towards the higher end of the range of $300 to $350 million after-tax through 2014.

Guidance for Full-Year 2014

Kimberly-Clark expects adjusted earnings in the range of $6.00-$6.20 for 2014, an increase of 4% to 7% from 2013 level. Net sales are expected to increase in a range of (1%) to 2% for 2014, with organic sales growth of 3% to 5%. The company expects currency to negatively impact sales by 2% to 3%.

Adjusted operating profit is expected to increase 3% to 7% for 2014, with cost savings of at least $300 million from the company's FORCE program. The company expects to repurchase shares of about $1.3 billion to $1.5 billion for 2014. The company's 2014 projections do not include transaction and related costs for the potential health care business spin-off announced in Nov 2013. This is expected be complete by the end of the third quarter of 2014.

Our Recommendation

We appreciate the company’s strong brand portfolio and an enhanced innovation and cost savings program, which helped it to beat earnings in the fourth 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).

Better-ranked stocks in the consumer staples sector include Post Holdings Inc. (POST - Snapshot Report), Green Mountain Coffee Roasters Inc (GMCR - Analyst Report) and WD 40 Co. (WDFC - Snapshot Report). While Post Holdings and Green Mountain carry a Zacks Rank #1 (Strong Buy), WD 40 Co holds a Zacks Rank #2 (Buy).

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