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costs, we see SG&A as a lever to help drive operating growth in the years ahead as the
company 1) continues to exercise disciplined cost management with zero-based
budgeting practices; and 2) works to take out costs over time related to the ~$100M
incremental costs associated with the separation from JNJ, including exiting transition
services agreements, primarily over the next two years as well as transition
manufacturing agreements, which we estimate account for roughly 60% of the
incremental stand-alone costs. At the same time, we expect KVUE to further support its
brands through increased advertising spending in the near term following a period of
This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
28
Andrea Teixeira, CFA AC
(1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
North America Equity Research
29 May 2023 J P M O R G A N
being more selective in 2022.
Specifically, we are modeling for SG&A as a percent of sales to be 42 bps unfavorable
YOY in 2023, roughly neutral in 2024, and 51 bps favorable in 2025, which would then
put SG&A as a percent of sales just below 2022 levels. Within SG&A, advertising has
been a bit lumpy and oscillated between favorable and unfavorable to margins over the
past three years. Investments increased in 2021 to support top-line growth and key
brands but were lower in 2022 as the company made more discriminating decisions on
advertising given the supply disruptions and inflationary cost environment (balancing
investment with profitability). We see the company stepping up investments in 2023 to
support the top-line growth, primarily in the Self Care segment.
Figure 40: KVUE Operating Expense Outlook
33.2%
31.7%
33.6% 33.4% 33.9% 33.9% 33.3%
2.7%
2.2%
2.4% 2.5%
2.6% 2.6%
2.6%
-250
-200
-150
-100
-50
0
50
100
150
200
250
29%
30%
31%
32%
33%
34%
35%
36%
37%
2019 2020 2021 2022 2023E 2024E 2025E
SG&A % of Sales R&D % of Sales YOY Favorable/(Unfavorable) bps
Source: Company reports and J.P. Morgan estimates.
Figure 41: KVUE Advertising Expense
8.8%
8.5%
9.7%
9.1%
9.5%
9-10%
-150
-100
-50
0
50
100
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
2019 2020 2021 2022 2023E Target
Advertising Expense % of Sales YOY Favorable/(Unfavorable) bps
Source: Company reports and J.P. Morgan estimates.
A&P Spend Is Up but Still Trails Most Peers, Yet...
KVUE􀋖s advertising spend of about 9.1% of sales is a bit below close HPC peers like
CL (11.1%) and PG (9.9%), although as we noted above we expect A&P spending to
step up 40 bps in 2023E to 9.5%. We note that some of the comparisons vs. peers are not
apples to apples as some companies account for go-to-market activities (e.g., sampling,
sales force, etc.) within advertising expense, which makes spend appear elevated. Also,
we note that marketing productivity has been up, which helps explain the relatively
higher efficient ratio (lower A&P as a percentage of sales). Historically, the company
had made efforts to improve SG&A efficiency through organization redesign (reduced
head count 10% from 2019-2022) and also increasing ROI on media spend by 28% from
2019-2021.
Figure 42: Advertising Expense vs. Peers
CY22 or Last Fiscal* where noted
0%
5%
10%
15%
20%
25%
30%