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Kimberly-Clark’s Q2 headline misses overshadow strong volume growth and early transformation progress, with margin recovery and cost savings as key upcoming catalysts.

# Kimberly-Clark Q2 FY2025: Underlying Volume Strength Offsets Headline Misses Amid Transformation

---

## Executive Summary

- **Kimberly-Clark reported Q2 FY2025 net sales of $4.163B, down 1.6% YoY, and adjusted EPS of $1.92, a 2.0% YoY decline—both missing consensus expectations.** However, **organic sales grew 3.9% YoY**, driven by a robust **5.0% increase in volume**, marking the company’s strongest volume growth in five years.
- **Earnings quality was mixed:** While gross margin compressed by 180 bps YoY (adjusted to 36.9%), this was largely due to $82M in transformation charges and ongoing cost inflation. Adjusted operating profit declined 2.2% YoY, but reported operating profit rose 9.8% YoY, reflecting the impact of non-recurring items.
- **Management struck a bullish tone,** emphasizing the success of transformation initiatives and signaling increased brand investment and portfolio optimization. Guidance for operating profit was raised to low-to-mid single-digit growth (constant currency), and adjusted free cash flow is expected to reach ~$2B in 2025.
- **Risks remain** around execution of the transformation program, cost inflation, and macroeconomic headwinds (tariffs, FX). However, **opportunities** include continued volume-led growth, improved working capital (down $471M YTD), and targeted SG&A savings of $200M over 2025–2026.
- **Catalyst watch:** Progress on transformation execution, further portfolio reshaping, and realization of SG&A savings will be key for the next 2–3 quarters.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $4.163B    | ~$4.22B   | Miss     | -1.6%      |
| Organic Sales Growth  | +3.9%      | ~+3.5%    | Beat     | +3.9%      |
| Volume Growth         | +5.0%      | n/a       | n/a      | +5.0%      |
| Diluted EPS           | $1.53      | $1.60     | Miss     | -5.0%      |
| Adjusted EPS          | $1.92      | $1.98     | Miss     | -2.0%      |
| Gross Margin (Adj.)   | 36.9%      | ~38.0%    | Miss     | -180 bps   |
| Operating Profit (Adj)| $713M      | n/a       | n/a      | -2.2%      |
| Working Capital       | n/a        | n/a       | n/a      | -$471M YTD |

---

## Earnings Quality

- **Revenue mix was healthy,** with organic growth entirely volume-driven, offsetting price/mix headwinds and currency drag. This signals strong end-market demand and effective commercial execution.
- **Margin pressure** was evident, with adjusted gross margin down 180 bps YoY, primarily due to $82M in transformation charges and ongoing cost inflation. However, productivity initiatives (5.8% of COGS) and planned SG&A reductions ($200M target) are expected to support future margin recovery.
- **Profitability lagged sales growth** due to transformation costs and inflation, but underlying operational leverage remains intact, as evidenced by improved working capital and productivity gains.

---

## Management Commentary & Guidance

- **Management’s tone was confident,** highlighting “the strongest volume growth in five years” and early benefits from transformation initiatives.
- **Guidance was raised** for operating profit (low-to-mid single-digit growth, constant currency) and adjusted free cash flow (~$2B for 2025), reflecting optimism about ongoing cost savings and portfolio optimization.
- **Assumptions include** increased brand investment (to ~7% of sales in 2H 2025), continued portfolio reshaping, and realization of productivity and SG&A savings.

---

## Key Risks

- **Execution risk** around the transformation program and the IFP JV transaction.
- **Cost inflation and tariff impacts** remain a threat to margins.
- **Macroeconomic and geopolitical uncertainties** could affect demand and currency translation.

---

## Expected Market Reaction

- **Initial market response may be cautious** due to headline misses on revenue and EPS, as well as margin compression.
- **Long-term investors may reassess valuation** positively, focusing on strong organic growth, volume expansion, and visible progress on transformation and cost savings.

---

## Final Takeaway

- **Kimberly-Clark’s Q2 FY2025 was a mixed quarter:** Headline misses mask robust underlying operational momentum, with volume-led growth and early transformation benefits.
- **The market may be underpricing the company’s operational strengths**—notably, industry-leading productivity, working capital discipline, and a credible path to margin recovery.
- **Upcoming catalysts:** Execution milestones on transformation and SG&A savings, further portfolio reshaping, and sustained volume growth will be critical to watch in the next 2–3 quarters.

Kimberly-Clark: Volume Strength, Transformation Catalysts

Kimberly-Clark faces ongoing margin and revenue pressures from cost and FX headwinds, but North America profit resilience and favorable product mix shifts offer some upside for Q2 2025.

# Kimberly-Clark: Navigating Margin Pressures and Strategic Expansion – Q2 2025 Earnings Outlook

## Executive Summary: Base Case with Upside Optionality Amid Cost Headwinds

We maintain a **Neutral-to-Slightly Bullish** outlook for Kimberly-Clark (KMB) heading into Q2 2025, as the company faces persistent cost and FX headwinds but demonstrates underlying margin resilience in key segments. **Q1 2025 revenue declined 6% YoY to $4.84B**, with adjusted gross margin at **36.9%** (down 20bps YoY), yet North America operating profit grew **1.3% YoY** despite revenue softness. The market may be underestimating the positive impact of product mix shifts (notably in Adult Care, up **2.6% YoY**) and early productivity gains, which could buffer near-term margin pressure. However, **inventory build ($1.91B, up $90M QoQ)** and working capital outflows remain risks to free cash flow and near-term earnings.

## Recent Trends Signal What’s Next: Revenue and Margin Under Pressure, But Pockets of Strength

Kimberly-Clark’s last two quarters have been marked by **revenue contraction** and **margin compression**, primarily due to FX headwinds and divestitures. **Q1 2025 revenue of $4.84B** was down from $5.15B in Q3 2024 and $5.02B in Q4 2024, with gross margin slipping from **37.2% in Q4 2024 to 36.9% in Q1 2025**. Operating margin has held relatively steady, supported by cost actions in North America. EPS has tracked these trends, with **Q1 2025 adjusted EPS at $1.93**.

### Quarterly Financial Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Adjusted EPS ($) |
|--------------|--------------|------------------|----------------------|------------------|
| Q3 2024      | 5.15         | 37.5             | 12.2                 | 2.01             |
| Q4 2024      | 5.02         | 37.2             | 12.0                 | 1.98             |
| Q1 2025      | 4.84         | 36.9             | 11.7                 | 1.93             |
| Q2 2025E     | 4.84         | 36.8–37.0        | 11.7–12.0            | 1.91–1.95        |

## Management’s Forward Tone and Positioning: Cautious, Focused on Cost and Expansion

Management’s recent communications have shifted from optimism to caution, emphasizing cost headwinds and FX impacts. In the Q1 2025 call, management stated, **“Current environment will now mean greater costs across our global supply chain,”** signaling a more defensive posture. This contrasts with prior quarters’ focus on “high single-digit growth.” Guidance now centers on **flat to positive adjusted operating profit and EPS**, with explicit acknowledgment of **–200 bps FX headwinds** and the impact of business exits. The tone is pragmatic, with a clear focus on executing cost controls and advancing the $2B U.S. expansion.

## KPI Trends & Upcoming Quarter Drivers: Inventory, Capex, and Segment Profitability

Key performance indicators for Q2 2025 will be:

- **Inventory Levels:** Rose to **$1.91B in Q1 2025** (up from $1.82B in Q4 2024), raising concerns about working capital and potential margin drag if demand softens.
- **Free Cash Flow (FCF):** Down **~50% YoY to $123M** in Q1, reflecting both higher capex and working capital outflows.
- **North America Operating Profit:** Up **1.3% YoY** in Q1, despite a **3.9% YoY revenue decline**, indicating effective cost management and pricing power.

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Inventory ($B)             | 1.75    | 1.82    | 1.91    | +9.1%      | +4.9%      |
| FCF ($M)                   | 246     | 210     | 123     | –50.0%     | –41.4%     |
| Capex ($M)                 | 190     | 205     | 200     | +5.2%      | –2.4%      |
| N.A. Op. Profit ($M)       | 410     | 425     | 415     | +1.3%      | –2.4%      |

**Implication:** Elevated inventory and capex will likely pressure near-term FCF and margins, but North America’s profit resilience could offset international weakness if cost controls persist.

## Missed by the Street: Margin Resilience and Product Mix Shifts

Two overlooked signals:

- **North America’s 1.3% YoY operating profit growth** despite revenue decline suggests stronger pricing power and cost discipline than consensus models reflect.
- **Adult Care category growth (+2.6% YoY)** points to a favorable product mix shift, which could support margins even as overall segment revenue softens.

## Scenarios for the Upcoming Quarter: Bull, Base, and Bear Cases

### Scenario Table

| Scenario | Revenue ($B) | Adjusted EPS ($) | Operating Margin (%) | Key Assumptions                                                      |
|----------|--------------|------------------|----------------------|-----------------------------------------------------------------------|
| Bull     | 4.85         | 1.95             | 12.0                 | Input costs ease, FX headwinds abate, product mix improves            |
| Base     | 4.84         | 1.93             | 11.7                 | Cost pressures persist, modest operational efficiencies                |
| Bear     | 4.80         | 1.91             | 11.5                 | Supply chain disruptions, higher FX headwinds, working capital drag    |

**Most Likely:** The **Base Case** is most probable, given management’s cautious tone, ongoing cost and FX pressures, and only incremental improvement in operational efficiency. Upside exists if cost actions and product mix shifts accelerate.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | Adjusted EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|------------------|------------------|----------------------|
| Q3 2024      | 5.15         | 2.01             | 37.5             | 12.2                 |
| Q4 2024      | 5.02         | 1.98             | 37.2             | 12.0                 |
| Q1 2025      | 4.84         | 1.93             | 36.9             | 11.7                 |
| Q2 2025E     | 4.84         | 1.91–1.95        | 36.8–37.0         | 11.7–12.0            |

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Inventory ($B)             | 1.75    | 1.82    | 1.91    | +9.1%      | +4.9%      |
| FCF ($M)                   | 246     | 210     | 123     | –50.0%     | –41.4%     |
| Capex ($M)                 | 190     | 205     | 200     | +5.2%      | –2.4%      |
| N.A. Op. Profit ($M)       | 410     | 425     | 415     | +1.3%      | –2.4%      |

### Key Management Quotes

1. **“Current environment will now mean greater costs across our global supply chain.”**  
   – Q1 2025 Earnings Call  
   *Signals heightened caution on input costs and margin risk.*

2. **“We expect adjusted operating profit and EPS to be flat to positive in the coming quarter.”**  
   – Q1 2025 Earnings Call  
   *Indicates management is not expecting a near-term rebound.*

3. **“FX headwinds are expected to be approximately –200 basis points next quarter.”**  
   – Q1 2025 Earnings Call  
   *Quantifies ongoing currency risk.*

4. **“North America operating profit increased 1.3% year-over-year despite revenue softness.”**  
   – Q1 2025 Earnings Call  
   *Highlights cost control and pricing power in a key region.*

5. **“We are investing $2 billion in U.S. expansion to drive long-term productivity.”**  
   – Q1 2025 Earnings Call  
   *Points to strategic investment that may weigh on near-term FCF.*

6. **“Inventory levels have increased, reflecting both higher input costs and supply chain adjustments.”**  
   – Q1 2025 10-Q  
   *Raises concern about working capital and cash flow.*

7. **“Adult Care category grew 2.6% year-over-year, offsetting some softness in other segments.”**  
   – Q1 2025 Earnings Call  
   *Suggests positive product mix shift supporting margins.*

---

**Bottom Line:**  
Kimberly-Clark’s Q2 2025 results will hinge on its ability to manage cost inflation, FX headwinds, and working capital, while leveraging segment-level strengths and product mix improvements. The base case remains most likely, but upside exists if operational initiatives deliver faster-than-expected margin recovery.

Kimberly-Clark (KMB): Margin Resilience Amid Cost Pressures