I am reeling, reeling about what happened today with Kimberly-Clark (KMB) and with Procter & Gamble (PG) last week. Like Procter, on the surface, you could make a strong case to own Kimberly-Clark given its release where the company talked about 2% growth and some very strong numbers in consumer tissue -- think Kleenex -- and personal care. There were some positive developments in Huggies diapers and adult care products. Tissue sales in North America increased 6% and developing and emerging markets increased 7%. Kimberly's professional segment increased 5%. Those were all good numbers, with organic growth twice as good as that of P&G. That's why the stock opened up almost two bucks.
But then you go under the hood and you are mesmerized by the weakness the headline numbers masked and how worrisome the future is for the company: challenging and competitive pricing, a gigantic spike in commodities almost across the board and devastating diaper numbers in China with mid-single digit declines in what had been their best growth market.
Worse, there's big Chinese share loss and it might not be coming back when you consider what CEO Thomas Falk told the analysts: "it's been the local Chinese brands that have actually probably picked it up through e-commerce."
Now it would be one thing if the issues just belonged to Kimberly Clarke but Procter & Gamble said the same thing with straight shooting CFO starting his conference call saying "it was a challenging quarter in a very tough environment."
Why is this so astonishing? Because this shouldn't be a challenging quarter and the environment should be benign. Think about it: we have synchronized global growth. We have very-good-to-improving employment both in this country and around the world. This is the moment when people should be trading up, not going down to private label. Worse, both companies are losing share in the emerging markets, often to inferior products though e-commerce. As Falk said "I think online is a place where you have fewer barriers to entry and so there is more players coming into that space." In other words it is just beginning.
It's so bad that the Procter call almost descended into abject contempt and bewilderment. Stephen Powers from Deutsche Bank questioned what Procter had gotten for all of its share. Lauren Lieberman from Barclays talked about how P&G was being hurt by disruptive and upstart brands like Harry's for shaving.
Perhaps Dara Mohsenian from Morgan Stanley said it best when she asked " Do you think there's been a material change in the profit growth outlook for the categories that P&G competes in, in the U.S. and globally versus what you would have expected a couple of years ago? I mean you're pointing to some problems in Baby and Grooming but you had negative pricing in every single division this quarter. That's despite a commodity spike. That's not the way branded consumer packaged goods companies are supposed to operate."
And that's really the issue here. There are structural changes bringing down prices, including the web, at the same time that you have raw costs going up. To me this is exactly what started happening to the food stocks not that long ago and I could argue it is just starting in this group now. Can you imagine if the commodity spikes continue and the economies of the world slow?
There was a time when these companies' yields would help brake the declines caused by fundamentals. But Procter's stock has fallen 20% and yields almost 4% and it's not stopping the decline. Kimberly's stock is down 18% and yields about the same. But with the 10-year Treasury yield flirting with 3%, that's just not enough protection.
I wish I had an answer. I have historically liked these stocks for their dividends and their consistent growth through thick and thin. You are still getting dividend growth, but these companies have hit a wall of price discovery and on-line private label goods.
So while I think anything can bounce, I can't in good conscious tell you to buy these. IN fact I would say these companies are suffering from an existential crisis and, sadly, they have just realized that there's no easy way out of the stifling box in which they now find themselves.
