At the time of writing this article I do not own shares in KVUE. This article is for entertainment purposes only, and is not meant to serve as investment advice.
KVUE Investors Look Away
On May 4, 2023 Kenvue went public on the New York Stock Exchange, closing the day at $26.40, above the IPO price of $22. Fast forward to Friday, February 9, 2024 and shares are trading at $19.33. Needless to say, this consumer health care company, formerly part of Johnson & Johnson, has not had a great start in public markets.
On Thursday, February 8, Kenvue reported Q4 and full year 2023 results, and offered some guidance for 2024. In today’s article I want to focus on their Q4 results, compare them to some competitors, and then take a look at guidance, and discuss why I believe Kenvue continues to disappoint.
Here We Go Again…
Kenvue reported the following for Q4 2023:
Net Sales of $3.67 billion, -2.7% year-over-year, missing expectations of $3.79 billion.
EPS of $0.31, beating expectations of $0.28 (no YoY comparisons as KVUE was not yet public)
Net Sales organic growth declined -2.4% year-over-year, with both organic and net sales declines led by +5.8% value realization and -8.2% volume declines (more on this later).
Gross margins increased to 55.7% from 54.3% for Q4. Adjusted operating margin came in at 21.8% versus 19.9% for the prior year. While Net Sales lag, Kenvue has been able to expand margins. This will have to continue for meaningful bottom-line growth.
Guidance definitely left more to be desired, and is why I believe the stock fell nearly 6% on the day they reported earnings. Kenvue sees 2024 Net Sales growth in a range of 1-3%, and organic growth in a range of 2-4%. They also expect adjusted operating margin to be lower than in 2023 and full year 2024 EPS in the range of $1.10-$1.20, which would mean zero growth in EPS if 2024 earnings comes in at the top end of their range.
Absolutely zero meaningful growth is expected for Kenvue in 2024, and margins are expected to deteriorate. I mentioned earlier margins would need to continue to expand for meaningful bottom-line growth, and it seems that this would have to be a 2025 story. With the market back at all-time highs and the ability to buy companies with real growth, it is no wonder Kenvue continues to be subject to analyst downgrades (which, for once, I agree with) and continued selling pressure. I’ll have more to say on Kenvue’s shortcomings after reviewing segment performance for Q4.
Segment Performance and Volumes
The Self Care segment, which includes brands such as Motrin, Tylenol, and Nicorette, saw Net Sales of $1.537 billion in the quarter, down from $1.568 billion in the previous year’s quarter.
Skin Health and Beauty, which includes brands such as Neutrogena, Aveeno, and OGX, saw Net Sales of $1.001 billion in the quarter, down from $1.088 in the prior year’s quarter.
Essential Health, which includes brands such as Listerine and Band-Aid, saw Net Sales of $1.128 billion, higher than the $1.111 billion a year ago.
Simply put, these volume declines are absolutely terrible. A couple of weeks ago when Procter & Gamble reported earnings we saw volumes level out internationally and continue to grow positively in most regions outside of China. While not a perfect overlap, P&G competes directly with Kenvue in many product categories. P&G saw the same China weakness in their Beauty segment that Kenvue would have seen, yet they didn’t have volumes down nearly 13% in the segment. These aren’t volumes that are just going to flip on a dime either, we are talking near double-digit volume declines, which could take many quarters to recover.
This tells us one of two things. One being that the products Kenvue offers are seen as replaceable by the consumer, which we know is not the case as many of their products are household staples. The second is that consumers do not feel the value they get out of Kenvue’s products are worth the cost. This is the point I agree with. When there is such a drastic difference in performance between two competitors it tells us one is doing something right and the other is doing something wrong. In this case, consumers feel they are getting a lot more value from P&G products than Kenvue products. Basically, consumers are picking Crest over Listerine.
Management admitted to “missteps” in North American Skin Health and Beauty, along with weakness in China, but there has to be more going on here. How is it possible these brands have absolutely no pricing power whatsoever, but comparable products of competitors do? I can’t wrap my head around it.
Self Care’s less than stellar performance was attributed to a weak cold and flu season. P&G mentioned this as well in their earnings report, but still didn’t see volumes down -6.3% in a quarter.
Final Thoughts
In my last report on Kenvue I discussed why I believed management was asleep at the wheel, and shared my decision to sell my shares of KVUE at a significant loss. I do not regret this and reiterate my stance that management is failing shareholders. There is no excuse for competitors to be significantly outperforming in every aspect of business. At some point you have to stop blaming the macro, the tough comps, etc, and take responsibility for your failure. One would think with a portfolio of strong brands of every day items you could steadily grow volumes and prices over time, and come out of downturns relatively quickly. This has proven to not be the case with Kenvue, which makes me wonder if there is any reason to even consider buying the stock.
Maybe my negative sentiment on Kenvue might be a sign to buy the stock to some, but I do not see a positive case to own this stock. The opportunity cost alone would keep me away. Sure it pays a dividend, but what is the positive catalyst for potential share growth? Earnings MIGHT not be as bad as expected? That’s not a great thesis to have, in my opinion.
KVUE shares currently trade at 20x earnings, and roughly 17x 2024 earnings. I expect Kenvue to continue losing any premium it otherwise would command over the market multiple as long as management continues to fail shareholders. If management showed any sign of competency, I have no doubt this stock would command a premium over the market because of its strong brand portfolio. Until then I remain negative on Kenvue.