Rising costs led Kimberly-Clark Corp., maker of Kleenex, Huggies and other household brands, to report an 8 percent decline in third-quarter net income Monday. It also cut its revenue outlook and the high end of its earnings outlook.
Like many companies, Kimberly-Clark is struggling with higher costs for oil, wood, pulp and other materials it needs to make and transport its products. Some of those costs have leveled off recently, but they're still far higher than they were a year ago.
To make up for those higher costs, Kimberly-Clark has raised prices on some products, a delicate dance because it risks driving away budget-conscious customers. Analysts raised concerns about whether customers would rebel against the higher prices, many of which will take effect in the last months of this year.
Softening demand in parts of Europe and North America were also a disappointment, though Kimberly-Clark pointed to its expansion in fast-growing foreign markets including China, South Korea and Latin America.
Net income fell to $432 million, or $1.09 per share. That was down from $469 million, or $1.14 per share, last year. Adjusted earnings of $1.26 per share were in line with expectations of analysts polled by FactSet.
Revenue was a bright spot, rising 8 percent to $5.38 billion, beating analysts' expectations for $5.29 billion. It was helped by a combination of higher prices on some products and higher sales in some areas, though analysts noted that overall sales volume was flat.
The revenue increase couldn't overcome a 13 percent increase in the cost of making products. And some of the revenue rise was a result of currency translation: When the dollar is weak, goods sold overseas translate into more dollars. However, Kimberly-Clark also said it expects that benefit to soften because some foreign currencies have weakened in the past four weeks.
The company's shares fell $3.35 Monday, or 4.6 percent, to close at $69.65.
CEO Tom Falk said the company will continue to look for ways to cut costs. The company also hopes new products, such as slip-on diapers and Kleenex boxes meant to fit in car doors, will help sales.
The company said that some softening sales volumes will probably prevent it from trimming costs as much as it had hoped this year. But it also said it is reacting more quickly to trim production when volumes fall.
In North America, sales of baby wipes and feminine-care products increased. Sales of safety products, such as helmets and goggles, and medical products, such as exam gloves, did well.
Diaper sales in North America suffered, which the company pinned to several changes in customer behavior. North American customers are having fewer babies, are more willing to trade down to cheaper brands, and are buying on a "just-in-time" basis instead of overstocking.
More moms are moving their children directly from diapers to potty training, which crimps sales of more-expensive and higher-margin training pants, the company said. Kimberly-Clark is also under pressure to offer discounts to keep up with rivals.
As U.S. customers get tapped out, Kimberly-Clark and other companies are relying on growth in emerging markets, trying to transform long-held behaviors of potential customers there whose incomes are rising. For example, Falk said, the company could sell training pants instead of just diapers in developing countries.
"It's taking a mom from using one diaper per day to using five diapers a day as they would in developed markets," he added.
Significantly, Kimberly-Clark said it expects higher prices for raw materials to cost it $575 million to $625 million for the year, down from previous assumptions of $650 to $750 million. That's because prices for some materials have fallen in recent months. However, those costs are still higher than they were a year ago, the company said, and it still expects to push through price increases through the fourth quarter.
In some cases, the company isn't raising the price outright but is offering smaller packages for the same price, such as rolls of toilet paper with fewer sheets.
Kimberly-Clark also said it expects an overall revenue increase of 4 to 6 percent for the year, down from previous predictions of 5 to 7 percent. It expects per-share earnings of $4.80 to $4.90 after adjusting for one-time expenses. Previously, it had said that earnings were expected to be in the lower half of a range from $4.80 to $5.05.