KMB is on the tape with Q1 EPS of $1.48, well ahead of consensus of $1.33. The company’s better than expected result was almost entirely flowed through to full year guidance that now stands at $5.60 to $5.75 (+$0.10 at the high and low end versus prior). The first quarter represented the toughest revenue comp on both a reported basis (+4.2%) and constant currency (+6.0%) as well as a difficult gross margin comparison (+246 bps). Reported revenue increased +1.5% while constant currency organic revenue increased 3.0% as gross margins improved 146 bps.
What we liked:
- Big beat and flow through on full-year guidance
- Solid performance against difficult comparisons on revenue and gross margins
- Superb operating leverage with +15.6% EBIT growth on 1.5% sales growth
- Company overcame $35 million of commodity inflation in the quarter
- Well-managed balance sheet as accounts receivables (+1.7% year over year) and inventories (+0.4%) increased in line with sales growth
What we didn’t like:
- FCF growth (+2.1%) lagged EBIT growth (+15.6%)largely due to an increase in capital spending
- $115 million in year over year EBIT growth continues to be primarily driven by cost savings ($85 million in the quarter)
- Substantial portion of year over year EBIT growth driven by delta in strategic marketing spending - +$45 million in Q1 2012 and “down slightly” in Q1 2013
- Valuation, which admittedly isn’t a catalyst and certainly matters less when estimates are going higher
Comparisons ease through the balance of 2013 on the top line as gross margin comps remain difficult for the next two quarters. However, the company decreased strategic marketing sequentially through 2012 so the significant benefit the company saw by decreasing marketing in Q1 2013 will become less impactful as 2013 progresses. However, the decline in the commodity complex should provide some margin benefit as we move through 2013, which is tough to fight. In addition, we recognize that we are fighting sentiment and money flows, but we also recognize that valuation matters at some point and we will keep KMB on our least preferred list.
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HEDGEYE RISK MANAGEMENT, LLC