Kenvue

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Kenvue is a global consumer health company with a portfolio of iconic brands operating in the Self Care, Skin Health and Beauty, and Essential Health sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Kenvue’s business is a straightforward one: sell consumer health products across a portfolio of iconic brands worldwide. What differentiates it is the “science and care” that forms a part of their brand’s reputation. A strong emphasis on research, innovation and consumer data are also key to how they operate. Their business can be broken into the Self Care, Skin Health and Beauty and Essential Health.

Here’s a more detailed breakdown of the business:

Self Care: This segment includes products like cough, cold, and allergy medications, digestive health remedies, and pain relief items such as Tylenol, Motrin, and Nicorette. This segment is heavily focused on products that are used for daily use and often have long brand recognition with consumers.
Skin Health and Beauty: This segment features brands such as Neutrogena, Aveeno, and Clean & Clear. These products address a wide range of skincare and cosmetic products as well as products that are well-known for their effectiveness.
Essential Health: This segment includes products that are used for the everyday health and wellness needs of consumers like Baby Care and Wound Care, with brands like Johnson’s, Band-aid and Coach.

The business also has a presence across a wide range of geographies— North America, Asia Pacific, and Europe Middle East and Africa—with well established market and brand recognitions in these regions.

Let’s discuss financials in more detail:

Revenues & Margins Kenvue generates substantial revenues, with total sales of nearly $15 billion in 2022 (as pro forma net sales from the parent company Johnson & Johnson), which was split across their three primary business segments. While the gross profit margin was strong at 59% in 2022, operating income has shown lower levels. There have been some fluctuations, such as in the last fiscal year, when the operating profit was 23.2% compared with 17% in their most recent earnings.

Looking more granularly, for Q3 2023, Skin Health and Beauty segment net sales was $1.31 billion, a decrease of $53 million or 4%, primarily driven by lower volumes. Self Care segment net sales were $1.18 billion, representing a small increase of 0.9% YOY. And lastly, Essential Health segment net sales were 875.5 million, a 4.1% decrease over previous year, primarily driven by a drop in volumes.

What is clear is that the underlying business has remained consistent in terms of generating revenues, while managing the balance of product performance, geographical segmentation, and cost structure. While there is a large emphasis on efficiency and optimization within the operations, management isn’t overly focused on short-term targets, showing that management cares more about the long term sustainability.

Debt Structure While Kenvue is a relatively new public entity, the balance sheet does not carry a concerning amount of debt. On an unadjusted basis, they have a debt-to-equity ratio of 0.3. The company carries roughly $6 billion in term debt that is maturing at different points. This gives the company a level of flexibility in managing cash flows and also funding acquisitions, which management has been talking about recently. Kenvue had $1.53 billion in cash at the end of the latest quarter.

Cash Flow and Capital Allocation Cash flows are relatively healthy, with over $1 billion in free cash flow in the first three quarters of 2023, however, the company has indicated that they might need to slow down repurchases for 2024 for various reasons, including the need to pay down debt and also invest more aggressively. While there were limited buybacks in the previous quarter, a new repurchase plan has been authorized, and the company has indicated that they will continue to return capital to shareholders through both dividends and repurchases in a balanced manner.

Now, let’s talk about the moat and competition in detail.

Moat Assessment Kenvue possesses a narrow economic moat rating with clear evidence of durable competitive advantages. However, we believe they don’t have a wide moat. The four main types of moats used are:

Intangible Assets: This is the strongest moat for Kenvue, their brands have a large value, built through decades of positive reception and consistent innovation. While there is a high degree of brand loyalty, the high switching costs for consumers also play a part. However, even with strong brands, the moat isn’t as strong as, for example, in pharmaceuticals due to ease of copying and lower regulatory hurdles.
Switching Costs: Switching cost moats are often found within business solutions, and do not apply as well to consumer facing brands. As a result, this is a weak moat for Kenvue.
Network Effect: The network effect has limited applicability here, as each purchase is relatively independent of other customers, and the company doesn’t have a clear network effect moat. 4. Cost Advantages: Kenvue’s distribution networks give it some cost advantages, but these are also not unique and therefore aren’t a significant enough source of a moat. Competitors can easily create or copy distribution networks, and there isn’t much to protect Kenvue.

Therefore, Kenvue’s strongest competitive advantages arise from its intangible assets, most importantly brands. But these aren’t indestructible moats, and therefore they don’t qualify for a wide moat. The company’s management has indicated a priority on sustaining its brands, but also expanding into new markets and innovative products.

Although Kenvue is a dominant player in consumer health, the competitive landscape is fierce and dynamic, creating barriers to a long term sustained moat. The company needs to continue to innovate and provide quality goods that consumers will continue to pay a premium for. A key risk is the rise of new entrants or new business models that are not easily predictable, and that are able to compete directly with Kenvue’s brand and pricing power.

Business Resilience Although Kenvue has several products that are highly dependent on specific geographies or regions, the company also is making huge investments in newer markets and product lines, giving it more opportunities to balance risk. The company is also focusing on e-commerce and other digital channels, which should prove beneficial in expanding its reach beyond traditional retailers. Further, they have a good history of delivering consistent cash flow, with room for both reinvestment and distribution to shareholders.

Understandability We are rating Kenvue at 3/5 for understandability. The product lines are fairly easy to grasp and the business is generally straightforward. However, the underlying financial drivers and the specific details about where the brand strengths really lie are more difficult to quantify and assess. For someone who is not deep into market and consumer behavior, it may be very tough to evaluate the business, and determine whether the moat is truly defensible.

Balance Sheet Health We rate Kenvue’s balance sheet at 4/5. The company’s cash position is strong and their debt-to-equity metrics are within reasonable boundaries. This gives them flexibility to respond to market conditions, take on new opportunities, and also sustain a healthy balance sheet in case of temporary difficulties. However, the company does have a good amount of debt, which needs to be repaid or refinanced at some point, increasing risks to their interest expenses. Therefore, management has emphasized a priority on keeping debt levels at manageable and sustainable amounts.

Overall, while Kenvue has a decent position within a stable and growing sector, management needs to keep executing properly to build upon its brand advantages, and also make strategic acquisitions to expand into new product categories. But despite all this, the lack of a deep-rooted and durable moat coupled with dependence on certain markets/geographies limits how high a moat rating Kenvue is able to achieve.