How Starboard may help boost value in Kenvue’s skin & beauty business

Business: Kenvue is a consumer health company. The company operates through three segments: Self Care, Skin Health and Beauty, and Essential Health. Self Care product categories include pain care; cough cold allergy; and “other self care.” The Skin Health and Beauty segment’s product categories include face and body care and hair, sun and others. The Essential Health segment’s product categories include oral care, baby care and other essential health. Its differentiated portfolio of brands includes Tylenol, Neutrogena, Listerine, Johnson’s, Band-Aid, Aveeno, Zyrtec and Nicorette. The company sells and distributes its product portfolio in more than 165 countries across its four regions. The four region consists of North America, Asia Pacific (APAC), Europe, Middle East, and Africa (EMEA), and Latin America (LATAM).

Stock Market Value: $43.36B ($22.64 per share)

Ownership: n/a

Average Cost: n/a

Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has taken a total of 152 prior activist campaigns in its history and has an average return of 25.02% versus 13.65% for the Russell 2000 over the same period. In 51 of these situations, Starboard had an operational thesis as part of its activist campaign, and it made an average return of 36.19% versus 15.29% for the Russell 2000 over the same period.

On Oct. 21, news broke that Starboard Value took a position in Kenvue. The firm thinks there is an opportunity to improve revenue growth and margins in the Skin Health and Beauty segment.

Kenvue is a consumer health company specializing in Self Care, Skin Health and Beauty, and Essential Health, with world-class brands that are synonymous with these three categories such as Tylenol, Neutrogena and Neosporin. The company was spun out of Johnson & Johnson in May 2023, which by all accounts seemed like a smart move by management as the consumer health sector lacked synergies with J&J’s core competencies of pharma and medtech. Coupled with the fact that consumer health only made up 16% of total sales for J&J prior to the spin, it was hard to argue against the merit of this separation that now allows a separate company to prioritize these great brands and businesses.

At a glance, post-spin, the company seemed poised to flourish. It has stronger brand recognition than peers like Colgate-Palmolive, Haleon, and P&G. It also has lower threat from private-label alternatives than peers, with private labels only having a 6% share of Kenvue’s product categories compared to a peer median of 10%. Additionally, Kenvue operates in extremely attractive end markets with structural tailwinds, including an increasingly health-conscious consumer and a growing middle class in emerging markets, that provide a strong foundation for low to mid-single digit revenue growth. Despite their enticing market position and superior brand quality, the company has traded poorly since its spin with the lowest valuation multiple of its peers at 18-times – staggeringly lower than the peer median of 25-times. As a result, the company has delivered a -15% total shareholder return since the IPO compared to a peer median of 6% shareholder return over the same period.

Kenvue has struggled with its organic growth in a way that it seems to have not expected. The company missed its post spin FY23 guidance for organic growth by 75 basis points, even after previously lowering their guidance by 25 basis points. Kenvue expects a 3.3% compound annual growth rate compared to a 4% median for peers. This is not a huge difference, but an issue that can easily be identified and rectified. Self Care delivered a strong year of 8.4% organic growth, and Essential Health grew ahead of expectations at 3.6% organic growth, so these sectors are not the issue. The challenge for the company lies within Skin Health and Beauty, which delivered only 1.8% organic growth despite peers growing 4.4% from CY19-CY23. If you were to take Skin Health and Beauty out of the picture, Kenvue’s organic growth from FY19-FY23 would have been 5.1%, significantly outperforming the consolidated market growth of 4%.

Starboard’s path to value creation involves management adopting a “marketing first” strategy and embracing omni-channel and digital marketing. Skin Health and Beauty has been proven to be a marketing business whose growth can be greatly aided by social media. This can make marketing an extremely powerful and profitable tool for companies that know how to use it. L’Oreal’s acquisition of CeraVe in 2017 serves as a strong example of this. After acquiring CeraVe for $1.3 billion, L’Oreal launched a hyper-focused digital marketing campaign that included iconic advertising material such as the witty “Michael CeraVe” campaign. While it may seem goofy, these strategies really work: Just look at CeraVe’s sales growth of 10-times over the first five years after the acquisition. Starboard plans to tackle the issues with the Skin Health and Beauty business head on, as it appears to be the key obstacle preventing Kenvue from creating immense shareholder value. There is no doubt about the strength of Kenvue’s brands and products in this sector — highlighted by two shining stars, Neutrogena and Aveeno — that remain highly regarded and widely purchased. A better marketing plan will not only increase the top line at Skin Health and Beauty but also should improve the operating margins, which are presently 12% versus a peer median of 17%.

Kenvue seems to already be making strides towards this business model, as they increased FY24 advertising spend to 11.1% of sales compared to 8.7% for FY23. This budget increase reflects a shift toward a “marketing first” approach, particularly through social media, as evidenced by their recent Neutrogena Collagen Bank product launch. First, the company introduced the product on TikTok prior to in-store distribution. Next, it partnered with major celebrity Hailee Steinfeld to be the face of the product, who currently has over 25 million social media followers. Lastly, the company introduced it in the early innings of the Collagen Bank beauty trend.

As far as activist campaigns go, there are two extremes. There are Herculean, heavy-lift campaigns, where the activist comes in pushing for a complete overhaul of the board, capital allocation, management team and operations. Then there is the “pushing an open-door” campaign — situations where the activist and company are aligned, there are clear paths to value creation and engagement is constructive. By all accounts, this situation is the latter. Kenvue has a solid business with iconic brands and one underperforming segment in Skin Health and Beauty. Starboard believes this can be remedied by embracing a marketing-driven culture, and this is already happening. Management has committed to prioritizing marketing. They have already begun pushing a marketing-first mentality with increased social media campaigns and celebrity partnerships. Starboard has not made any public demands for board representation, and we expect that they will monitor Kenvue’s progress as an active shareholder before making any decisions in this regard. However, the firm does not have that much time to spare as the nomination window for directors is between Nov. 11 and Dec. 11. It is possible that Starboard will nominate some directors just to preserve its rights while it is talking with management and monitoring the progress.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.