Kenvue Earnings: Pressured Volumes Give Investors Headaches, but Shares Look Slightly Undervalued

Wide-moat Kenvue KVUE reported its first earnings as a standalone public company with solid results. Total sales were up 5.4%, mainly helped by another strong quarter from self-care which was up 12.2% and offset by slight depression in volume in other segments and unfavorable foreign currency. We continue to see Kenvue’s robust pricing power and its ability to pass over elevated input costs to customers as value realization—which is defined by the company as impact from price and mix—was up nearly double digits on a consolidated level. We attribute this to Kenvue’s strong intangible assets, driven by its portfolio of market-leading brands, including Tylenol, Listerine, and Band-Aid. We maintain our fair value estimate of $27.50 per share.

Volume proved challenging for the quarter as skin health and beauty as well as essential health both saw a low- to mid-single-digit drop. But portfolio rationalization and the suspension of sales to Russia were the two major causes and we suspect a flat volume growth excluding these impacts.

Sequential improvement in gross margin, up 30 basis points, came in slightly weaker than our expectations especially given the continued hefty price hikes. Volatile market conditions and infrastructure buildup costs pose headwinds and, while we still expect a higher margin for the remainder of the year from optimizing supply chain efficiencies, we slightly pulled back our improvement assumptions for the near term.

We expect the back half of 2023 to face tough sequential as well as year-over-year top-line comparison from two main reasons. The last quarter benefited from a significantly high inventory restocking and the second half of 2022 saw material tailwinds from a strong cold and flu season, which we expect to slow for 2023. But rather than viewing this as a challenge, we see this as a normalizing environment and a return of a stable market especially for cough and cold products and analgesics.