Below-the-line headwinds (KMB)
Kimberly-Clark reported Q4 EPS of $1.54, above consensus expectations of $1.51. Organic sales grew 5% with ASP increasing 10%, mix adding 1%, and volumes declining 7%. Fx was a 5% headwind to revenue growth.
- Personal Care organic sales grew 2% with ASP up 7%, mix adding 2%, and volumes decreasing 7%. Sales in North America were flat with ASP of 5% and volume declines of 6%.
- Consumer Tissue organic sales grew 5% with ASP of 11% and volume declines of 6%. Sales in North America decreased by 2% with ASP of 8% and volume declines of 6%.
- K-C Professional organic sales grew 16% with ASP of 20%, mix adding 1%, and volumes decreasing by 5%. Sales in North America grew 17% with ASP of 19% and volume declines of 2%.
Gross margins expanded over 270bps, the first significant expansion in two years. Operating margins contracted 100bps.
Management guided 2023 EPS growth to 2 to 6% driven by organic sales growth between 2 to 4%. Consensus expectations were for low double-digit EPS growth. Fx is expected to be a 2% or $300-400M headwind. Input costs were a $245M headwind. Advertising costs are expected to increase by 100bps. Operating margins are expected to expand ~80bps at the midpoint. Gross margin guidance is implied to drive the operating margin expansion including the increased advertising spend. Both interest rates and the effective tax rate are expected to be headwinds to EPS growth. Kimberly-Clark is on our short bias list. Our concerns include commodity costs, pricing power, and the volumes necessary to leverage expense growth. After two years of gross margin contraction causing the EPS growth to be below target, below-the-line items are expected to be the reason in 2023.
Self-picking (KR, WMT)
Instacart said it is winding down in-store shopping for curbside pickup orders at select grocery stores. The change is in response to the grocers moving to fulfill their own orders. Instacart will still have in-store shoppers at the grocers who pick up the items and then deliver them. Tops Markets, a mostly New York state supermarket chain, was one of the grocers that announced transitioning to using its own employees for curbside pickup at its 58 stores.
Instacart recently lowered its internal valuation to roughly $10B at the end of 2022, down from $39B last spring when it filed for an IPO. The company still plans on going public in 2023 after delaying plans indefinitely in October. It is more efficient for the grocer to do the picking for curbside pickup. The grocer can assign other duties to the employee when not filling orders, avoids a markup, gains control over the experience, and can benefit from scale. Larger chains like Walmart and Kroger have been handling curbside orders themselves.
Falling fertilizer prices (PPC)
Seven of the eight major fertilizer prices at retail have continued to slide in 2023. Anhydrous ammonia and Potash prices have fallen 9% from last month to the lowest price since November 2021. MAP, urea, UAN28, and UAN32 have also declined M-HSD% at retail. All of the eight top fertilizers have fallen back to levels of autumn 2021, before the surge in prices. Ample supplies at wholesalers are also contributing to falling retail prices. The major ingredient in nitrogen fertilizers, natural gas, has seen prices fall globally, but not in California. Compared to various row crop prices and oil, fertilizer has the highest correlation to food at home CPI with a five month lead time. That would coincide with much larger base effects in the 2H. Meat companies are among the most impacted by lower row crop prices, but most food and beverage companies would benefit.
