Kimberly-Clark (KMB) markets products of a humanitarian nature, such as baby diapers and feminine pads, which are critical to the health and hygiene of women, girls, and babies. KMB is famous for brands such as Huggies, Kleenex, and Scott.

KMB's business performance has been shaky over the last five years. The stock has returned nothing over the past five years even though it has traded in a band of approximately 110 and 150.

KMB underwent restructuring in 2019, 2020, and 2021. It took restructuring charges of $366 million, $199 million, and $354 million respectively. In 2023 it took a $658 million Asset Writedown charge. It currently undergoing its 2024 Transformation Initiative. It is evident that KMB is grappling to discover the right business model to return to its glory days.

2024 Transformation Initiative

On March 27, 2024, KMB initiated a “Transformation Initiative” hoping to achieve the following goals:

• reduce cost base by reorganizing into three new business segments,

• optimizing the global supply chain, and

• making the corporate and regional cost structures more efficient.

This transformation initiative will lead to a workforce reduction of 4% to 5%. Now, the end of 2026 is almost two years out. Investors would be in a long haul with KMB. And one never knows if another operational efficiency program will be announced.

It is worth noting that Wall Street generally loves an operational rehaul and a CEO with a track record of having delivered previously. Look no further than how the market reacted to the CEO change at Starbucks.

One of the most eye-popping successful restructuring changes has been Meta. Meta came out clean from the operational efficiency program and out came the glasses and the AI-related products.

All that said, let’s look at KMB’s financial statements.

KMB’s Income Statement Analysis

Observations of the table above:

• The revenue growth rate has been abysmal. So, KBM should not expect much love from investors.

• While the Gross Margin declined in 2021 and 2022, it recovered in 2023. KMB was at the forefront of selling personal protective equipment such as gloves, apparel, and masks. More on this when we look at the quarterly numbers.

• The key concern is that the percentage growth rate of SG&A is faster than that of the revenue growth rate. Therein lies your answer about why the current transformation initiative is required.

• The restructuring charges and asset write-down charges are shown for informational purposes. As discussed, this is not a good look for the management and the board.

• Net Income has been distorted by all the restructuring charges. Now the question is: KMB has serially been restructuring, should they be considered one-off events? How one answers that question will determine if one adjusts the Net Income or not. I will do it for the most recent quarter below.

Observations on the table above:

• Most of the commentary while discussing the yearly income statements applies. However, KMB seems to be getting a handle on its SG&A.

• The restructuring and asset write-down charges are for the 2024 Transformation Initiative. Expect these items to show up in future quarters well into 2026.

• The interesting item is from the “Gain from Sale of Assets”. This requires a lengthier discussion than one line.

Adjusting KMB’s Net Income for Q3 2024

The $556 million benefit is not a small matter in the context of a $907 million Net Income. However, what was this for?

I found the July 1 date interesting as it pushed the recognition of the sales to Q3. If it were done in Q2, the gain wouldn’t have been there. Since this is a one-time item let’s adjust the Net Income for Q3.

It doesn’t look as good as the headline numbers would suggest, does it? Very simply, there is a broad operational slowdown and weakness at KMB. Are there any other issues lurking around?

Solvency Concerns

Observations on the table above:

• The current and quick ratios (less than 1 for both) suggest that KMB could be in trouble in case of a liquidity crunch. However, it has enough EBIT to cover its interest expense.

• KMB is relying on more debt to fund ongoing operations and corporate changes. If interest rates don’t behave and continue to rise despite the FED cutting rates, there could be trouble in KMB land.

Conclusion

It makes sense to skip the valuation part as cheap can get cheaper. KMB is an avoid and those who run a long/short book can look at shorting it based on your system.

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