Kenvue Earnings: Turnaround Story Begins as Investment Behind Brands Delivers Margin Growth

Wide-moat Kenvue reported solid second-quarter results that came in higher than we originally expected. Total sales of $4.0 billion slightly slipped 0.3% year-over-year but still came in above our $3.9 billion forecast. More importantly, the firm delivered a 1.5% organic growth driven by 2.1% price and mix with 0.6% offset from volume. Despite 2023's figures heavily benefiting from unusually high inflation, we are impressed at Kenvue's ability to lap last year and still return positive price contributions. Volume left a little bit to be desired, but we somewhat attribute this to tough comparisons, a slow start to allergy season, and a soft Chinese market. Moving down the line, margins were uplifted, with gross margin expanding 360 basis points. Margins look to have already benefited from Our Vue Forward, a cost-saving strategy announced last quarter. All in, we think today's numbers signal a turnaround for Kenvue, which has struggled since going public last year and the market appreciated solid results, with shares up about 13%. While macro challenges remain and there is still much work to be done to reach its full potential operating leverage, we have high confidence on Kenvue to benefit from its portfolio of high-intangible brands, and we expect strong momentum to continue over the next few quarters. After updating our model and accounting for time value of money, we inch up our fair value estimate to $26 per share from $25.50.