Shares of Kimberly-Clark Corporation (KMB - Free Report) have lost 4.4% in the past three months, while the industry declined 1.2%. The consumer goods company has been battling input cost inflation as well as strained gross margins. However, Kimberly-Clark is strongly concentrating on its Focus on Reducing Costs Everywhere or FORCE program, as well as its 2018 Global Restructuring plan.
These solid efforts should help the company offset the aforementioned hurdles, and revive the Zacks Rank #3 (Hold) stock.
Cost Hurdles AaWorry
Kimberly-Clark is battling higher input costs, which have been troubling the company for a while now. Evidently, commodity cost inflation of $175 million, stemming from greater costs of pulp and other raw materials, caused Kimberly-Clark’s adjusted operating profit to fall 3% in the first quarter of 2018. For 2018, management now expects input cost inflation of about $400-$550 million, higher than the previously projected range of $300-$400 million.
Moreover, the company is struggling with strained gross margin, which has been declining year-over-year for quite some time now. In first-quarter 2018, gross margin contracted roughly 890 bps to 28% on account of commodity cost inflation and lower selling prices.
Will 2018 Global Restructuring & FORCE Programs Help?
Kimberly-Clark has been taking robust steps to lower costs. This is highlighted by its recently unveiled 2018 Global Restructuring Program and its ongoing FORCE Program. Management remains encouraged about its 2018 Global Restructuring Program, which marks the company’s biggest restructuring in a long time now. This plan is likely to enhance the company’s underlying profitability, help it compete better and provide greater flexibility to undertake growth-oriented investments. Delving deeper, we note that the program is expected to simplify Kimberly-Clark’s overhead organization and manufacturing supply chain structures.
Notably, management expects cost savings of $50-$70 million from this program in 2018. Further, the company expects pre-tax savings of $500 million to $550 million from this program by the end of 2021, backed by production supply chain efficiencies and reduction in workforce. Further, the program will benefit all segments of the company, alongside being gainful for each major geographical region. Moreover, management originally announced plans to shut or divest nearly 10 manufacturing facilities, as well as expand production capacity at various other facilities to enhance scale and curtail costs.
In this regard, the company revealed its intentions to sell or exit some low-margin businesses that deliver about 1% of net sales, mainly concentrated in the consumer tissue unit. Progressing on these lines, management recently announced plans to close its Consumer Tissue facility in California, while it also revealed intentions to shut down its nonwovens facility in Wisconsin.
Also, Kimberly-Clark is aggressively cutting costs through its FORCE Program. In the first quarter, Kimberly-Clark generated savings of $90 million from this program and anticipates cost savings of $400 million in 2018. The company also expects to generate more than $1.5 billion over the four-year period, from 2018 to 2021. This will stem from management’s focus on enriching productivity at manufacturing facilities, optimizing design and raw material expenses, and attaining distribution efficiencies.
On a combined basis, Kimberly-Clark expects cost savings of more than $2 billion from the FORCE program and 2018 Global Restructuring Program, over the next four years. It looks like these robust endeavors along with Kimberly-Clark’s key growth initiatives will likely bring the stock out of the woods.
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