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Kimberly-Clark (KMB -2%) is pulling back today after the paper-based consumer product manufacturer reported Q1 results this morning. It reported modest EPS upside while revenue fell 6% yr/yr to $4.84 bln, but was generally in-line. The main problem was the FY25 guidance, which was reduced primarily to a higher level of expected costs.

• Quickly on the Q1 results, sales declined due to a combination of its PPE divestiture, the exit of its private label diaper business in the US and some FX impact. However, organic sales still declined 1.6%, driven by a 1.5% decrease in price while volume and mix were in line with a year ago. In fairness, 1Q25 was lapping 1Q24 (+5.6%), which was KMB's strongest organic growth quarter in FY24. However, KMB said Q1 organic sales were slightly below internal expectations while profitability was in-line.
• On the call, an analyst noted that KMB's North America segment significantly trailed the scanner retail data despite KMB saying there was not a lot of retailer destocking. KMB responded that weighted average category growth came in at 1.5-2.0% whereas KMB had expected around 2%. KMB also had one fewer day in the quarter relative to the scanner. The company also had some planned strategic pricing investments in terms of price pack architecture across several markets and categories.
• In terms of the guidance, KMB expects tariffs will result in greater costs across its global supply chain vs expectations at the beginning of the year. KMB lowered its outlook for adjusted operating profit to be flat to positive on a constant-currency (CC) basis vs prior guidance of high single-digit growth (CC). Adjusted Free Cash Flow in FY25 is now expected to be approximately $2 bln vs prior guidance of more than $2 bln.
• The headwinds are mostly on the cost side, not really on the sales side. KMB notes that its categories continue to exhibit very resilient demand as its brands are well-known (Huggies, Kleenex, Scott, Kotex, Cottonelle, Depend etc.) Increasingly, affordability has become paramount and KMB is very focused on that as middle income to lower income households are hurting.

Overall, Q1 was a solid quarter for KMB although the weakness in North America was a bit of a surprise. The lowered guidance seems to be the main catalyst for the weakness today. Consumer products are seen as a defensive sector because people will always need to buy diapers, toilet paper etc. However, they are not immune from tariffs, especially on the cost side. These companies have global supply chains, which means higher input costs. We suspect we will hear a similar story from Procter & Gamble (PG), when it reports on Thursday before the open.