How Starboard can help drive value in Kenvue’s skin and beauty business

Business: Kenvue is a consumer health company. The company operates in three segments: Self Care, Skin Health & Beauty, and Essential Health. Self-care product categories include pain care; allergy to cold cough; and “caring for the self of others.” Product categories of the Skin Health and Beauty segment include face and body care and hair, sun and others. Product categories of the Essential Health segment include oral care, baby care and other essential health. Its differentiated brand portfolio 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 regions consist of North America, Asia Pacific (APAC), Europe, Middle East and Africa (EMEA) and Latin America (LATAM).

Market value of shares: $43.36 billion ($22.64 per share)

Ownership: n/a

Average cost: n/a

Comment from the activist: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has taken a total of 152 previous 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 those situations, Starboard had an operational thesis as part of its activist campaign and made an average return of 36.19% versus 15.29% for the Russell 2000 over the same period.

On October 21, news broke that Starboard Value took a position in Kenvue. The firm believes 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 synonymous with these three categories such as Tylenol, Neutrogena and Neosporin. The company was spun off from 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 pharmaceutical and medical technology competencies. Coupled with the fact that consumer health accounted for just 16% of total sales for J&J before the spin-off, it was hard to argue against the merit of this split now allowing a separate company to prioritize these great brands and businesses.

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

Kenvue has struggled with its organic growth in a way it apparently didn’t expect. 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 annual growth of 3.3% compared to an average of 4% for peers. This is not a major change, but an issue that can easily be identified and corrected. Self Care delivered a strong year with 8.4% organic growth and Core Health grew ahead of expectations with 3.6% organic growth, so these sectors are not the problem. The challenge for the company lies in Skin Health and Beauty, which delivered just 1.8% organic growth despite peers growing 4.4% from CY19-CY23. If you strip out Skin Health and Beauty, Kenvue’s organic growth from FY19-FY23 would have been 5.1%, significantly outpacing the consolidated market’s 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 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 materials such as the sharp “Michael CeraVe” campaign. As silly as it may sound, these strategies really work: Just look at CeraVe’s 10x sales growth in the first five years after the purchase. Starboard plans to address issues with the Skin Health and Beauty business, as it appears to be the main obstacle preventing Kenvue from creating significant 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 in Skin Health and Beauty, but should also improve operating margins, which are currently 12% versus an average of 17%.

Kenvue appears to be already making strides towards this business model, as they increased FY24 ad spend to 11.1% of sales compared to 8.7% for FY23. This budget increase reflects a shift to a “marketing first” approach, particularly through social media, as evidenced by Neutrogena’s recent Collagen Bank product launch. First, the company introduced the product on TikTok before in-store distribution. She then teamed up with celebrity Hailee Steinfeld to be the face of the product, which currently has over 25 million social media followers. Recently, the company introduced it to the beginnings of the Collagen Bank beauty trend.

When it comes to activist campaigns, there are two extremes. There are Herculean, heavy-handed campaigns where the activist comes in pushing for a complete overhaul of the board, capital allocation, management team and operations. Then there’s the “pushing the door open” campaign—the situation where 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 an 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 is committed to prioritizing marketing. They are already starting to push a marketing-first mentality with increased social media campaigns and celebrity partnerships. Starboard has not made any public requests for board representation, and we expect them to monitor Kenvue’s progress as an active shareholder before making any decisions in this regard. However, the firm does not have much time to spare as the window for director nominations is between November 11 and December 11. It is possible that Starboard may appoint some directors just to preserve its rights while it is talking to management and monitoring 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 13D activist investments.