Kenvue Goes Public as the Largest Pure-Play Consumer Health Company
This highly anticipated IPO did not disappoint investors.
All information used in this article can be found in the Kenvue prospectus document. If you find this information useful, be sure to subscribe to never miss a newsletter. It’s free!
Finally, an IPO!
In November 2021, Johnson & Johnson JNJ 0.00%↑ announced that they would be spinning off their consumer health company into its own separately traded company. Almost a year and a half later, these plans finally came to fruition as Kenvue began trading on the New York Stock Exchange on May 4, 2023. This IPO has been highly anticipated, as many companies have held off going public due to less than favorable market conditions. Today, we will take a look at Kenvue, its business, brands, financials, and growth opportunities as it embarks on its journey as a publicly traded company.
Kenvue breaks the ice covering the IPO market, raising nearly $4 billion as it spins off from Johnson & Johnson.
Kenvue brings with it a very strong portfolio of well-known and trusted brands across multiple business segments.
Slow and steady will win the race for shareholders.
What is Kenvue?
Kenvue KVUE 0.00%↑ describes itself as 'the world's largest pure-play consumer health company by revenue.' They believe their differentiated portfolio of iconic brands, which includes Tylenol, Neutrogena, Listerine, Johnson's, Band-Aid, Aveeno, Zyrtec, and Nicorette, is 'built for moments that uniquely matter to our consumers and, we believe, drives positive health outcomes around the world.'
Kenvue operates in the $365 billion consumer health market, of which they expect to grow at a rate of 3% to 4% annually through 2025. The Self Care subcategory is a $107 billion market, Skin Health and Beauty is a $220 billion market, and Essential Health is a $38 billion market. Ten of their brands across these categories had net sales over $400 million in 2021, with continued growth projected through 2022.
As of 2021, net sales were balanced across the business segments and geographies. Self Care accounted for 38% of sales, Skin Health and Beauty totaled 30% of sales, and Essential Health contributed 32% of sales. As shown below, approximately half of the sales came from outside North America.
Kenvue has a broad portfolio of trusted brands that are leaders in their categories. Kenvue currently holds five #1 brand positions across major categories globally, with many other #1 brand positions in smaller regions. One of these brands, Band-Aid, was voted the most trusted brand in the United States in June 2022. Their largest brands by net sales are (in order): Tylenol, Nicorette, Zyrtec, Neutrogena, Aveeno, OGX, Listerine, Johnson’s, Band-Aid, and Stayfree. Below are selected brands for each category and brands that hold leadership for their respective category.
Kenvue believes that the following tailwinds in the Consumer Health industry will benefit their business:
Increasingly empowered consumers focused on their health.
Global healthcare systems embracing proactive and preventive health and wellness.
Traditional retailers increasing their focus on health and wellness.
Digital ecosystems creating new opportunities and personalized solutions.
Premiumization reflecting shifting purchase drivers among consumers.
Aging population.
Growing middle-class in emerging markets.
In addition to these industry-wide tailwinds, Kenvue identifies other areas for growth. For example, from August to December 2021, they were able to increase Neutrogena's social media followers by 660% following the 'SkinU' campaign on TikTok. These consumer-centric marketing campaigns are viewed as growth opportunities for the company. Other key growth strategies include increasing product availability through their omnichannel strategy, maintaining a consistent cadence of innovation, expanding their product portfolio into product adjacencies and extending their geographic footprint, as well as continually evaluating acquisitions that enhance their core product portfolio and capabilities.
From a business perspective, Kenvue will not differ much from when it was with Johnson & Johnson. It will continue to manufacture and distribute branded products across a variety of consumer health categories. Being a separate company will allow them to streamline costs and have more freedom to acquire new brands to strengthen their portfolio.
The Financials
Kenvue is in an exceptionally strong financial position as it embarks on its journey as an independent company. Below is the balance sheet provided in its prospectus document. As a publicly traded company, Kenvue starts with almost $800 million in cash, no debt, and an incredibly robust balance sheet. This financial strength enables Kenvue to initiate dividend payments in Q3 2022, with anticipated quarterly payments starting at $0.20.
The chart below presents the income statement for Kenvue during the years 2019, 2020, and 2021. In 2021, the company achieved a gross margin of 56%, an operating margin of 19.4%, and a net profit margin of 13.5%. This means that for every $100 in sales, Kenvue retains $13.5 for reinvestment into the business or to distribute as dividends to shareholders. In comparison, Procter & Gamble's healthcare segment has a net profit margin of 18.5%, indicating room for improvement for Kenvue. It is expected that margin expansion will be a topic of discussion during Kenvue's future earnings calls. However, it is important to note that these margins are considered healthy for a consumer packaged goods company and should not be a cause for concern.
Finally, the chart below illustrates the performance per segment during the first nine months of the fiscal year in 2022. Net sales are evenly distributed across the three business segments, with Self Care accounting for 39.9% of sales, Skin Health and Beauty at 29.2%, and Essential Health at 30.9%. This balanced distribution of sales, coupled with diverse global sales patterns, is crucial for risk mitigation. Kenvue is not excessively vulnerable to changes in consumer spending habits or fluctuations in commodity and material costs in any particular region or segment of their business, which is a risk that many companies face.
The summary of these financial statements indicates that Kenvue possesses robust financials, which should come as no surprise considering its 135-year history with Johnson & Johnson. Although not shown in the provided information, Kenvue's cash flow is expected to be strong and will likely be a key focus as the company becomes publicly traded. As a mature company not experiencing annual growth rates exceeding 20%, shareholders will be closely monitoring stable cash flow, reliable dividends, and the absence of financial surprises from quarter to quarter
A Note for Johnson & Johnson Shareholders
Currently, Johnson & Johnson owns 90.9% of Kenvue. Shareholders of Johnson & Johnson will be receiving shares of KVUE for each share of JNJ they own, which will be paid out by the end of 2023. It is currently unclear how many shares of KVUE will be given per share owned of JNJ, but we will learn this in the coming months. Once the shares of KVUE are distributed from JNJ, JNJ will no longer own 90.9% of Kenvue, and the new shareholders of KVUE will be free to buy more, sell, or hold their shares from JNJ. This will likely cause volatility in the stock around the time they pay out the shares.
My Thoughts on Kenvue
Kenvue is an IPO that I have been eagerly anticipating since November 2021 when Johnson & Johnson announced the spin-off of their consumer health business. As a company with a wide range of trusted brands that consumers use every day, it has secured a place in my portfolio. Consequently, I wasted no time and purchased shares shortly after trading commenced on Thursday, May 4th, with my first buy order at $25.50.
Kenvue's primary competitor is Procter & Gamble, which accounts for 45% of my portfolio. I expect this spin-off to enable Kenvue to directly compete with P&G and even expand into additional categories to challenge them further. This outcome will ultimately benefit consumers, as they will experience product innovation and potentially lower prices.
Kenvue is not at the forefront of the AI revolution. It should not be anticipated to deliver 20% growth, exhibit significant volatility, or introduce groundbreaking innovations. Instead, Kenvue is a classic slow and steady stock. Shareholders can expect healthy and growing dividends, stock buybacks over time, and management focused on cost-cutting to expand margins and drive earnings growth. While it may not be the most exciting company, Kenvue has the potential to be a long-term winner in a stock portfolio. As long as people need products like Tylenol for headaches, Band-Aids for scratches, and Neutrogena for skincare, I am believer in Kenvue.
Great write up and analysis! Excited to watch and see what Kenvue can deliver as its own entity!