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Kenvue’s Q2 FY2025 saw sales and EPS miss expectations, with margin stability driven by cost cuts amid broad-based revenue declines and a strategic review underway to address ongoing headwinds.

# Kenvue Q2 FY2025: Margin Resilience Amid Top-Line Pressure and Strategic Reset

---

## Executive Summary

- **Kenvue reported Q2 FY2025 net sales of $3.839 billion, a 4.0% YoY decline, missing consensus expectations** as organic sales fell 4.2%. Adjusted diluted EPS came in at **$0.29** (down from $0.32 YoY), also below Street estimates, while GAAP EPS improved to **$0.22** (up from $0.03 YoY) due to prior-year impairments rather than operational gains.
- **Earnings quality was mixed**: While gross margin slipped to 58.9% (down 20 bps YoY), **cost discipline helped maintain an adjusted operating margin of 22.7%**. However, this was achieved through **SG&A and R&D cuts** and higher restructuring expenses, not through sustainable sales or pricing improvements.
- **Management struck a cautious, defensive tone**, citing weak allergy/sun care demand, inventory reductions, and adverse channel dynamics. The company announced a **strategic review** and potential portfolio optimization, with a renewed focus on digital, AI, and e-commerce, and several new senior leadership appointments.
- **Guidance was revised downward**: Kenvue now expects a low-single-digit sales decline and adjusted EPS of $1.00–$1.05 for FY2025, reflecting ongoing top-line softness, inventory headwinds, and a less favorable sales mix.
- **Risks remain elevated**: Persistent margin pressures, tariff impacts, FX volatility, and broad-based sales declines across all major segments weigh on the outlook. However, the strategic review and digital investments could provide upside if executed well. **Near-term catalysts** include updates on the strategic review and any asset divestiture announcements.

---

## Performance Snapshot

| Metric                | Reported      | Consensus   | Surprise      | YoY Change      |
|-----------------------|--------------|-------------|---------------|-----------------|
| Revenue               | $3.839B      | $3.95B      | -$111M        | -4.0%           |
| Organic Sales Growth  | -4.2%        | -2.0%       | -220 bps      | -               |
| Adjusted EPS          | $0.29        | $0.32       | -$0.03        | -9.4%           |
| GAAP EPS              | $0.22        | $0.18       | +$0.04        | +$0.19          |
| Gross Margin          | 58.9%        | 59.1%       | -20 bps       | -20 bps         |
| Adjusted Op. Margin   | 22.7%        | 22.5%       | +20 bps       | Flat            |
| Restructuring Expense | $68M         | $60M        | +$8M          | +$10M           |

**Segment Highlights:**
- **Self Care, Skin Health & Beauty, and Essential Health**: All posted net and organic sales declines, with only EMEA and LatAm regions showing relative strength.

---

## Earnings Quality

- **Revenue mix was challenged** by volume declines, particularly in allergy and sun care, and shipment timing issues in China. Price/mix did not offset volume losses.
- **Gross margin compression** (down 20 bps YoY) reflected higher input costs, adverse mix, and increased tariffs (annualized headwind of ~$150M).
- **Adjusted operating margin stability** was achieved through **cost controls**: SG&A and R&D spending were reduced, but restructuring expenses rose to $68M (from $58M YoY), indicating a reliance on cost-cutting rather than organic growth.
- **Profitability remains fragile** as margin preservation is not underpinned by sustainable top-line or pricing strength.

---

## Management Commentary & Guidance

- **Management’s tone was defensive and realistic**, highlighting ongoing demand softness, inventory reductions, and channel headwinds.
- **Strategic review launched**: Focus on portfolio optimization, potential divestitures, and accelerated investment in digital, AI, and e-commerce.
- **Leadership changes**: Four new senior leaders appointed to drive operational execution and transformation.
- **Guidance revised downward**: FY2025 sales now expected to decline low-single digits; adjusted EPS guided to $1.00–$1.05 (vs. prior, more optimistic outlook). Assumptions reflect continued volume and mix challenges, persistent cost inflation, and tariff headwinds.

---

## Key Risks

- **Cost inflation and margin pressures** from tariffs, input costs, and unfavorable mix.
- **Regulatory and demand-side risks**: Weak allergy/sun care season, inventory reductions, and channel dynamics.
- **FX volatility** and broad-based sales declines across all major segments.
- **Execution risk** around strategic review and digital transformation.

---

## Expected Market Reaction

- **Investor sentiment is likely to be cautious**: The market may focus on the revenue and adjusted EPS miss, as well as the downward guidance revision.
- **Analysts may question the sustainability of margin preservation** given the reliance on cost cuts and restructuring.
- **Potential upside** if the strategic review leads to value-creating divestitures or operational improvements, but this is not yet fully priced in.

---

## Final Takeaway

- **Kenvue’s Q2 FY2025 was a fragile quarter**: Margin resilience was achieved through cost discipline, not organic growth, and all major segments saw sales declines.
- **The market may be overvaluing the GAAP EPS beat**, which was driven by one-off items, while underappreciating the underlying margin and volume pressures.
- **Key upcoming catalysts**: Progress updates on the strategic review (including any asset sales or portfolio changes) and early signs of digital/e-commerce execution.
- **Investors should monitor**: Execution on cost initiatives, the pace and outcome of the strategic review, and any signs of operational turnaround in core segments.

---

Kenvue (KVUE): Margin Stability, Strategic Reset Amid Sales Decline

Kenvue faces ongoing margin pressures and soft revenue, but strategic review and cost controls could stabilize performance and unlock shareholder value ahead of Q2 2025 earnings.

# Kenvue Inc. (KVUE): Navigating Margin Pressures and Strategic Shifts Ahead of Q2 2025 Earnings

## Executive Summary

We maintain a **Neutral** outlook on Kenvue Inc. (KVUE) for the upcoming Q2 2025 earnings quarter. While **preliminary Q2 revenue is expected at ~$3.59B (down 4% YoY)** and **EPS guidance is $0.21–$0.22**, management’s focus on portfolio optimization and cost controls may help offset persistent margin headwinds, particularly in the Skin Health & Beauty segment. The market may be underestimating the potential impact of the newly formed strategic review committee, which signals possible structural changes that could alter the company’s near-term trajectory. **Key risk:** Margin compression remains a concern, but stabilization in retail inventory and FX could provide upside if management executes effectively.

## Recent Trends Signal What’s Next

Kenvue’s last two quarters highlight a challenging but potentially stabilizing environment. **Q1 2025 revenue was $3.74B (up slightly vs. consensus), with a gross margin of 58.0% and operating margin of 14.9%.** However, adjusted operating margin compressed by 220 bps YoY, reflecting cost pressures. **Preliminary Q2 revenue of ~$3.59B** suggests continued top-line softness, but the pace of decline is moderating. The Self Care segment showed **+0.3% organic growth in Q1**, while Skin Health & Beauty remains a drag.

### Quarterly Financial Trend Table

| Quarter   | Total Revenue (US$B) | Gross Margin | Operating Margin | EPS   |
|-----------|----------------------|--------------|------------------|-------|
| Q3 2024   | 3.80                 | 59.2%        | 16.1%            | 0.25  |
| Q4 2024   | 3.68                 | 58.5%        | 15.3%            | 0.23  |
| Q1 2025   | 3.74                 | 58.0%        | 14.9%            | 0.24  |
| Q2 2025*  | ~3.59                | –            | –                | 0.21–0.22* |

*Q2 2025 figures are preliminary/guided.

**Trend:** Revenue is trending slightly down, with margins under pressure, but the rate of decline is slowing—suggesting a possible inflection if cost actions take hold.

## Management’s Forward Tone and Positioning

Management’s communication has shifted from steady confidence to a more proactive, strategic stance. In Q1, the tone was “committed and focused,” but by Q2, language such as **“reviewing strategic alternatives”** and **“optimizing brand portfolio”** has emerged. The appointment of interim CEO Kirk Perry and the formation of a strategic review committee underscore a willingness to consider significant changes.

**Key quotes:**
- “We are reviewing strategic alternatives to unlock shareholder value.” (Q2 2025 Preliminary Release)
- “We’re optimizing our brand portfolio to accelerate profitable growth.” (Q2 2025 Preliminary Release)

Compared to prior quarters, this marks a shift from incremental improvement to potential structural transformation, signaling both caution and opportunity.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q2 2025 are **Free Cash Flow (FCF), Capex, and Short Interest**:

### KPI Movement Table

| KPI                | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| FCF (US$M)         | 265     | 210     | 249     | -6%        | +19%       |
| Capex (US$M)       | 153     | 162     | 179     | +17%       | +10%       |
| Short Interest (%) | 3.4     | 3.0     | 2.24    | -34%       | -25%       |

- **FCF**: Remains solid but is pressured by rising capex, which could limit near-term cash flexibility.
- **Capex**: Up 17% YoY, reflecting investment in digital and operational initiatives.
- **Short Interest**: Down 34% QoQ, indicating improved market sentiment and potentially less volatility.

**Impact:** If capex investments yield efficiency gains, margin pressure could ease. Lower short interest may support share price stability around earnings.

## Missed by the Street

Two subtle but important signals:
- **Strategic Review Committee:** The formation of this committee and repeated references to “unlocking shareholder value” suggest that management is open to divestitures, M&A, or other structural moves—potentially a catalyst not fully reflected in consensus estimates.
- **Dividend Increase:** The modest **1.2% QoQ dividend hike** and a **P/E of 38.8 (below peers)** indicate management’s intent to support investor confidence, a nuance that may be overlooked amid headline margin concerns.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue (US$B) | EPS Estimate | Operating Margin | Key Assumptions                                                      |
|----------|----------------|--------------|------------------|----------------------------------------------------------------------|
| Bull     | 3.65 – 3.70    | 0.23         | ~15%             | Retail inventory normalizes, cost controls succeed, FX stable        |
| Base     | 3.59 – 3.62    | 0.21–0.22    | 14.5% – 15%      | Cautious recovery, strategic adjustments offset margin headwinds     |
| Bear     | <3.59          | <0.21        | <14.5%           | Persistent FX/tariff headwinds, continued margin compression         |

**Most Likely:** The **Base case** is most probable, given current evidence of stabilizing revenue, ongoing cost actions, and management’s cautious but proactive tone.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter   | Revenue (US$B) | EPS   | Gross Margin | Operating Margin |
|-----------|----------------|-------|--------------|------------------|
| Q3 2024   | 3.80           | 0.25  | 59.2%        | 16.1%            |
| Q4 2024   | 3.68           | 0.23  | 58.5%        | 15.3%            |
| Q1 2025   | 3.74           | 0.24  | 58.0%        | 14.9%            |
| Q2 2025*  | ~3.59          | 0.21–0.22* | –        | –                |

### KPI Movement Table

| KPI                | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| FCF (US$M)         | 265     | 210     | 249     | -6%        | +19%       |
| Capex (US$M)       | 153     | 162     | 179     | +17%       | +10%       |
| Short Interest (%) | 3.4     | 3.0     | 2.24    | -34%       | -25%       |

### Key Management Quotes

1. **“We are reviewing strategic alternatives to unlock shareholder value.”**  
   Source: Q2 2025 Preliminary Release  
   *Signals openness to structural change; could be a catalyst.*

2. **“We’re optimizing our brand portfolio to accelerate profitable growth.”**  
   Source: Q2 2025 Preliminary Release  
   *Implies focus on margin improvement and possible divestitures.*

3. **“We expect net sales growth of +1% to +3% for the full year.”**  
   Source: Q2 2025 Guidance  
   *Sets a cautious but positive sales outlook.*

4. **“Adjusted operating margin declined 220 basis points year-over-year.”**  
   Source: Q1 2025 Earnings Call  
   *Highlights ongoing margin pressure.*

5. **“We are seeing early signs of normalization in retail inventory levels.”**  
   Source: Q1 2025 Earnings Call  
   *Suggests potential for revenue stabilization.*

6. **“FX headwinds have moderated from ~3% to ~1%.”**  
   Source: Q1 2025 Earnings Call  
   *Eases a key external risk for the next quarter.*

7. **“The board has declared a $0.2075 quarterly dividend, up 1.2% QoQ.”**  
   Source: Q2 2025 Dividend Announcement  
   *Supports investor sentiment and signals confidence.*

---

**Bottom Line:**  
Kenvue’s Q2 2025 will be a test of management’s ability to stabilize revenue and margins amid ongoing headwinds. Watch for signals from the strategic review and inventory trends as key swing factors for the quarter.

Kenvue (KVUE): Margin Pressures and Strategic Review