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Morningstar | Higher Prices Are Aiding Kimberly-Clark’s Near-Term Sales, but Competitive Headwinds Persist

Even in an intensely competitive landscape, we believe Kimberly-Clark derives its narrow moat from its entrenched relationships with retailers and the resources it maintains to invest behind its brand mix in terms of both product innovation and marketing. In the aggregate, this spending equated to more than 5% of sales, or $1 billion annually on average the past five years. We view this level of investment as a way to differentiate its fare and sustain its retail relationships, which is essential in light of the competitive pressures it faces from other global peers and smaller, niche foes that have proved agile in responding to evolving local consumer tastes and preferences. To fund this spending, Kimberly is working to extract excess costs from its operations. Further, we view Kimberly's strategic emphasis over the past several years to shutter its less profitable operations (the bulk of its Western and Central European diaper business, some of its lower-margin consumer tissue operations, and the spin-off of its healthcare business) to focus on its core mix of iconic brands as favorable, supporting the intangible asset source of the firm's narrow moat.Although it operates with well-known brands like Huggies, Kotex, and Kleenex, the firm's categories are susceptible to intense competition around the world. For one, sustained improvement in its childcare segment has proved elusive, and as such, we think Kimberly has fallen victim to renewed product innovation by peers, including Procter & Gamble. Pampers (P&G's largest brand with more than $8 billion in annual sales) has overtaken Huggies and now controls around 45% of the U.S. diaper market, and P&G's share lead, which is 1,000 basis points above Kimberly-Clark's, has continued to expand the past few years (up from just 300 basis points). Beyond diapers, P&G’s entry into the U.S. adult incontinence market in summer 2014 also has taken a toll on Kimberly’s dominant edge in the space (still north of 50%), as the firm has cited ceding share to P&G. As the pace of changing consumer trends accelerates, we think the onus is on Kimberly-Clark at home and abroad to ensure its products consistently win with consumers.