Kenvue Earnings: Soft Outlook and Volume Loss Cause Headache but We Think Shares Are Cheap

Kenvue KVUE reported third-quarter earnings that were in line with our expectations. Total sales were up 3.3% year over year, largely thanks to price and mix, which contributed to 7.1% of total growth with 3.5% offset from volume loss. Management trimmed the top end of full-year sales guidance by 100 basis points after citing a soft outlook for the fourth quarter, driven by a weaker cold and flu season, as well as more challenging foreign exchange impact. We updated our near-term assumptions, but impacts from adjustments were not material and we maintain our fair value estimate of $27.50 per share.

Kenvue continues to boast strong pricing power, with all three of its segments posting mid-single-digit value realization (defined by the firm as impacts from price and mix). While it is difficult to parse out what percentage of that growth comes purely from price, we see Kenvue benefiting from price actions taken earlier this year. It also has consistently shown its ability to pass high input costs over to its customers and gain shares in the market thanks to its strong brand intangibles.

Self care, Kenvue’s largest product segment, continues to put out strong performance, with this quarter’s sales up 6.4% year over year. Despite having a portfolio of mature brands, Kenvue continues to roll out new innovations—for example, Motrin Dual Action, a product that combines core ingredients from Motrin and Tylenol, was recently launched, and Nicorette secured an indication for vaping cessation in the United Kingdom. We see this as fuel for the segment and one of the key attributes that reaffirms the firm’s wide moat. Having said that, we are forecasting weaker fourth-quarter sales for the segment because it is lapping last year’s atypically strong flu season. But we see this as a near-term hiccup in an otherwise strong business.