Starboard's activism may increase Kenvue's skin and beauty business value.

Company: Kenvue Inc (KVUE)

The company is a consumer health business that operates through three segments: Self Care, Skin Health and Beauty, and Essential Health. The Self Care segment includes pain care, cough cold allergy, and "other self care" product categories. The Skin Health and Beauty segment's product categories include face and body care, hair, sun, and others. The Essential Health segment's product categories include oral care, baby care, and other essential health. The company's 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: North America, Asia Pacific (APAC), Europe, Middle East, and Africa (EMEA), and Latin America (LATAM).

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

Activist: Starboard Value

Ownership: n/a

Average Cost: n/a

Starboard is a highly successful activist investor with a wealth of experience in helping companies improve operational efficiency and increase margins. Over the course of its history, Starboard has launched a total of 152 activist campaigns, achieving an average return of 25.02% compared to 13.65% for the Russell 2000 over the same period. In 51 of these situations, Starboard had an operational thesis as part of its campaign, and it delivered an average return of 36.19% compared to 15.29% for the Russell 2000 over the same period.

What's happening

On October 21st, it was reported that Starboard Value had invested in Kenvue. The company believes that there is potential to enhance revenue growth and profitability in the Skin Health and Beauty division.

Behind the scenes

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

Despite having a strong brand, low threat from private-label alternatives, and attractive end markets, Kenvue has underperformed since its spin with a lower valuation multiple and a negative total shareholder return.

Kenvue has struggled with its organic growth, falling short of its post-spin FY23 guidance by 75 basis points, even after lowering their guidance by 25 basis points. Despite this, the company expects a 3.3% compound annual growth rate, which is below the median for peers. The issue lies within Skin Health and Beauty, which delivered only 1.8% organic growth despite peers growing 4.4% from CY19-CY23. If Skin Health and Beauty is removed from the equation, Kenvue's organic growth from FY19-FY23 would have been 5.1%, significantly outperforming the consolidated market growth of 4%.

Starboard aims to increase value creation in Skin Health and Beauty by adopting a "marketing first" strategy and leveraging omni-channel and digital marketing. Social media has proven to be a powerful tool for marketing businesses, as seen in the growth of L'Oreal after acquiring CeraVe in 2017 and launching a hyper-focused digital marketing campaign. Kenvue's brands and products are highly regarded and widely purchased, but the key obstacle to creating immense shareholder value is the Skin Health and Beauty business. A better marketing plan will not only increase the top line but also improve the operating margins, which are currently lower than the peer median.

Kenvue is moving towards a "marketing first" approach, as evidenced by their recent Neutrogena Collagen Bank product launch. They increased their FY24 advertising spend to 11.1% of sales compared to 8.7% for FY23. This budget increase reflects their shift towards social media marketing, as seen in their launch of the product on TikTok prior to in-store distribution. They also 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 the product in the early innings of the Collagen Bank beauty trend.

Activist campaigns can be categorized into two extremes: Herculean campaigns, where the activist advocates for a complete overhaul of the board, capital allocation, management team, and operations, and "pushing an open-door" campaigns, where the activist and company are aligned, there are clear paths to value creation, and engagement is constructive. In the case of Kenvue, this situation is the latter. Kenvue has a solid business with iconic brands and one underperforming segment in Skin Health and Beauty. Starboard believes that this can be remedied by embracing a marketing-driven culture, and this is already happening. Management has committed to prioritizing marketing and has 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 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

Ken Squire is both 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.