Kimberly-Clark

Kimberly-Clark's organic sales were flat in the second quarter, with lower prices negating the benefit from favorable mix. Adjusted operating margin expanded 100 basis points to 18.1%, as cost savings (pegged at 6% of cost of goods sold) funded brand and supply chain investments.

Why it matters: Beyond navigating a challenging consumer spending backdrop, Kimberly's results also reflected the impact of retail inventory destocking in North America and a social media scandal in China alleging quality issues in its diaper portfolio (claims that were independently verified as false). Even as these factors stand to take a toll on results this year—the China issue alone is slated to constrain sales growth by 100 basis points to just 1%—we don’t expect Kimberly to forgo spending on its brands and capabilities, which we see as a prudent course. We forecast 11% of sales ($4 billion) to be directed to research, development, and marketing and another 4.5% ($1.6 billion) to capital expenditures annually, inclusive of the pending tie-up with wide-moat Kenvue.

The bottom line: We don't expect our $133 fair value estimate for narrow-moat Kimberly to change after incorporating results through the first six months of the year. Shares trade at a 17% discount to our valuation. The market's visibility into Kimberly's prospects is muddied by the massive portfolio restructuring (exiting its private-label diaper business, spinning off its international tissue business, and acquiring Kenvue), but we think share gains continue to justify the company's brand spending.

Coming up: Despite the integration risk around the Kenvue acquisition, we see strategic merits in the transaction. Kenvue had been slow to embrace crucial tenets of competing in consumer packaged goods. As such, we expect expanding distribution and more effectively spending behind the brands will be prioritized once the deal is consummated.

We're trimming our fair value estimate for Kimberly-Clark to $131 per share, from $133, after incorporating mixed second-quarter results (flat organic sales alongside a 100-basis-point expansion in the adjusted operating margin to 18%). The firm has ratcheted down its full-year sales assumptions due to retailer inventory destocking in North America and a social media scandal in China alleging quality issues in its diaper mix (which have since been independently verified as unfounded).

Our valuation also takes into account its $48.7 billion deal to acquire Kenvue's brands, which is slated to close in the second half of 2026. The firm targets around $2 billion in cost synergies (30% from sales, marketing, and trade spending, 30% from cost of goods sold, and 40% from general and administrative). This equates to about 15% of Kenvue's cost of goods sold and operating expenses, which seems high to us. Beyond parting ways with the underperforming pieces of Kenvue's portfolio (with management citing the potential for a 30% reduction in stock-keeping units), we also expect it to leverage its distribution reach and invest more effectively behind its brands. Despite this, our long-term forecast for 3% annual organic sales growth, with operating margins averaging in the high teens, holds.

On a stand-alone basis, Kimberly has withstood tariff-related angst and the secondary effects on global consumer spending that have plagued firms across the consumer products sector. Although supply constraints have largely stabilized and inflationary pressures have moderated, the firm continues to pursue opportunities to eliminate inefficiencies, thereby blunting any resurgence in cost pressures, enhancing its operating model, and fueling brand investments. More specifically, Kimberly aims to leverage cost savings by implementing new technologies, streamlining stock-keeping units, modernizing its supply chain, and strategically adjusting its organizational structure. These measures are expected to result in over $3 billion in gross productivity gains, $200 million in savings in selling and administrative expenses, and $500 million in working capital enhancements. In fiscal 2025, management unlocked productivity at more than 6% of its adjusted cost of goods sold. While much consternation abounds about whether a stabilizing cost environment and an improving supply backdrop could incite an intensifying promotional landscape, we believe the fruits of these initiatives will serve to bolster brand investment in consumer-valued innovation, which we see as a judicious means to blunt competitive angst while supporting its brand standing with retailers and end consumers.

But before the pandemic and the ensuing supply issues, Kimberly was already on a course to improve its sales trajectory. After taking the helm in January 2019, CEO Michael Hsu charged the firm with elevating its brand spending and improving its prospects in emerging markets and online, where it was underpenetrated. And we continue to see this strategic course as sound. This is reflected in our forecast for organic sales growth to be roughly split between higher prices and increased volume in the longer term. We expect gains to be driven by personal care (more than half of sales), as volumes are propped up by an increase in adult incontinence products and greater diaper usage in China and other emerging markets. Conversely, we see a more muted trajectory within consumer tissue (historically about one-third of sales), given the lack of differentiation among various offerings in the aisle.

Even with the pending Kenvue acquisition, we assign a narrow moat to Kimberly-Clark, anchored in intangible assets. We surmise Kimberly's brand leadership in household and personal care is underscored by six brands that generate north of $1 billion in annual sales (on top of the four at Kenvue), with meaningful market share, including Huggies, Scott, Kleenex, Cottonelle, Depend, and Kotex. Moreover, investments in consumer-valued innovation and marketing enable it to defend shelf space in a consolidating retail environment and to stymie encroachment by lower-price private-label competition. As such, we believe Kimberly's vast category reach, rich pool of consumer insights, and extensive portfolio make it a key partner as retailers work to attract customer traffic and ensure reliable product availability—a challenge that smaller, less-established brands struggle to meet. Overall, Kimberly has generated average returns on invested capital, including goodwill, of 20% over the past five years, exceeding our 7% weighted average cost of capital estimate. And we think returns will exceed our cost of capital estimate over the next decade.

Kimberly is a leading operator in multiple categories, positioning it as a crucial partner for retailers. Kimberly's strength in personal care, which has historically accounted for more than half of its sales, is particularly advantageous, in our view, as consumers' trust in brand safety and efficacy is paramount. This is evidenced by the lower private-label penetration within the global beauty and personal care category at just a low-single-digit percentage, materially lagging the high-teens to low-20s share private label has amassed in US food and beverage overall.

Kimberly leads in the global adult incontinence market, with its Depend and Poise brands commanding a 19% market share. Despite attractive growth prospects (stemming from an aging consumer base and the potential for increased usage), the firm has maintained its global standing. However, its relative strength varies across geographies and weakens when the focus is solely on the US, where Kimberly-Clark's market share declined to 41% in 2025 from the low 50s a decade earlier. This follows P&G's re-entry, as it captured a 15% share. Further, private-label brands are a force to be reckoned with, holding nearly 26% share in the US. Moving to diapers, Kimberly's Huggies brand has also gained share globally, rising to more than 16%, up from 15.5% in 2019. This makes it the second-largest global player, shy of wide-moat P&G’s Pampers brand, which holds a nearly 21% share. However, in Asia-Pacific, Kimberly has occasionally succumbed to intense local competition, as its fare has at times failed to keep pace with evolving consumer trends. Lastly, in menstrual care (another category where growth prospects are expected to persist as the stigma surrounding usage is alleviated), Kimberly has long held second position, with 8% share. Still, it falls behind P&G’s 21% stronghold.

We believe Kimberly's brand investments support its solid market share and entrenched retail relationships. Over the past five years, Kimberly allocated an average of 1.5% of sales to research and development and 5% to marketing, totaling $325 million and $1 billion, respectively, in 2025. Although the firm's investments have materially lagged peers' double-digit levels, we’re pleased it has increased this spending since CEO Mike Hsu took the helm in 2019. Kimberly leverages extensive insights across categories to complement its spending, drawing on a database of over 100 million zero- and first-party consumers, according to the firm. We think these investments should enable it to bring innovative products to market to win with consumers. Beyond bolstering its market share, we see this spending as crucial to achieving pricing power. In this context, Kimberly chalked up an average price hike of 1% against 1% volume growth over the past 15 years (including robust pricing taken over the past few years). When considering gross margin as a proxy for pricing power, though, our confidence is tempered, with Kimberly’s 34% 10-year average margins lagging the 50% and 59% average gross margins at P&G and wide-moat Colgate, respectively.

Further supporting the firm's moat, Kimberly has prudently rationalized its mix by shedding less profitable operations. This includes divesting most of its Western and Central European diaper business, some lower-margin consumer tissue operations, its healthcare segment, and its personal protective equipment arm. These strategic actions have allowed Kimberly to concentrate resources on its core offerings, thereby enhancing its intangible assets.

That said, we don’t view all of Kimberly’s brands the same and thus posit the firm has fallen short of a wide moat. For one, even though it is the leading branded operator with a 10% share in the retail tissue aisle (historically around 30% of sales), Kimberly lacks a durable competitive edge. Instead, we expect the commodity-like nature of this segment to make it hard to differentiate brands, prompting consumers to choose based on price over brand, particularly in times of economic duress. This is evidenced by the leading share of private labels, at more than 25%. As such, we lack confidence that its returns on invested capital will exceed our cost of capital estimate over the next two decades, as required for a wide moat.

Beyond this, we don’t think the firm benefits from any other moat source. To identify companies well-positioned to manage customer acquisition costs, we’ve analyzed five-year average direct operating margins, focusing on manufacturing and distribution costs while excluding advertising, R&D, non-cash expenses such as depreciation and amortization, and non-recurring costs. Kimberly’s 25% direct operating margin sits materially below the 35% median among its HPC peers, suggesting the firm doesn’t have a cost advantage.

Kimberly is working to streamline its stock-keeping units, modernize its supply chain,

and strategically adjust its organizational structure. These efforts have enabled it to realize half of its $3 billion multiyear savings target through the end of 2025.

We're encouraged that management has emphasized its reluctance to rent-share, defying pressure to rely on promotions to drive volume, even as consumer spending remains lackluster.

We view Kimberly's brand investments as key to differentiating its fare from lower-price private-label offerings and other nationally branded peers.

Following its recent private-label exit, Kimberly disclosed it lost shelf-space exclusivity at a major club store (presumably Costco), opening the door to increased competition.

A social media scandal in China alleging quality issues in its diaper portfolio (claims that were independently verified as false) is hampering sales this year and could impair its brand standing.

With no switching costs, Kimberly-Clark's volume could erode if its new products miss the mark with evolving consumer trends, particularly to the extent it raises prices to offset persistent cost pressures.