Kenvue is a division of Johnson & Johnson’s consumer health business.
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Company name: Kenvue Inc (KVUE)
Business: Kenvue is a consumer health company. The company operates through three segments: Self-Care, Skin Health and Beauty, and Essential Health. The self-care product category includes pain care. cough-cold allergies; and “other self-care.” Product categories in the Skin Health & Beauty segment include face and body care, hair, sun, etc. Product categories in the Essential Health segment include oral care, baby care, and other essential health. The company’s differentiated brand portfolio includes Tylenol, Neutrogena, Listerine, Johnson’s, Band-Aid, Aveeno, Zyrtec and Nicolette. The company sells and distributes its product portfolio in more than 165 countries across four regions. The four regions consist of North America, Asia Pacific (APAC), Europe, Middle East and Africa (EMEA), and Latin America (LATAM).
Stock market value: $43.36 billion ($22.64 per share)
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Kenvue stock price in 2024
Activist: Starboard Values
Ownership: N/A
Average cost: N/A
Activist Comment: Starboard is a highly successful activist investor with extensive experience helping companies focus on operational efficiency and profitability. Starboard has run a total of 152 activist campaigns in its history, with an average return of 25.02% over the same period, compared to 13.65% for the Russell 2000. In 51 of these situations, Starboard put up operating theory as part of an activist campaign, with an average return of 36.19% over the same period, compared to 15.29% for the Russell 2000.
what’s happening
On October 21st, news broke that Starboard Value had acquired a position in Kenview. The company believes there is an opportunity to improve revenue growth and margins in the skin health and beauty segment.
behind the scenes
Kenvue is a consumer health company focused on self-care, skin health and beauty, and essential health, with world-class brands synonymous with these three categories, including Tylenol, Neutrogena, and Neosporin. The company was spun off from Johnson & Johnson in May 2023, but from anyone’s perspective, the management team was weak because the consumer health division lacked synergy with J&J’s core pharmaceutical and medical technologies. seemed like a wise choice. Coupled with the fact that consumer health businesses accounted for only 16% of J&J’s total sales prior to the separation, this separation allows a separate company to prioritize these superior brands and businesses. It was hard to argue with its merits.
At first glance, after the spin-off, the company seemed poised to prosper. It has higher brand recognition than its peers such as Colgate-Palmolive, Haleon, and P&G. Additionally, Kenvue’s private label share of product categories is only 6%, compared to a median of 10% for its peers, making it less threatened by private label substitutes than its peers. Additionally, Kenvue operates in very attractive end markets with structural tailwinds such as increasingly health-conscious consumers and a growing middle class in emerging markets, which has led to This is a strong foundation for mid-year earnings growth. Despite its attractive market position and superior brand quality, the company has had a valuation multiple of 18x since its spin, the lowest among its peers and surprisingly lower than the median peer rating of 25x. Trading is sluggish at this level. As a result, the company has achieved a total shareholder return of -15% since its IPO, compared to the median shareholder return of its peers, which had a median shareholder return of 6% during the same period.
Kenvue has struggled with organic growth in unexpected ways. The company missed its fiscal 2023 post-divestment organic growth guidance by 75 basis points, despite previously lowering its guidance by 25 basis points. Kenvue expects average annual growth of 3.3%, compared to a median of 4% for its peers. This isn’t a huge difference, but it’s an issue that’s easy to identify and fix. These sectors don’t matter, as self-care had a strong year with 8.4% organic growth, and essential health grew better than expected with 3.6% organic growth. The company’s focus is on skin health and beauty, and organic growth was only 1.8%, compared to peers’ growth of 4.4% from CY19 to CY23. Excluding skin health and beauty, Kenvue’s organic growth from FY2019 to FY2023 was 5.1%, significantly higher than the consolidated market growth rate of 4%.
Starboard’s path to value creation includes management adopting a “marketing first” strategy and embracing omnichannel and digital marketing. Skin Health and Beauty has proven to be a marketing business whose growth is greatly facilitated by social media. This makes marketing a very powerful and profitable tool for companies that master it. L’Oréal’s acquisition of CeraVe in 2017 is a case in point. After acquiring CeraVe for $1.3 billion, L’Oréal launched a highly focused digital marketing campaign that included iconic advertising materials such as the witty “Michael CeraVe” campaign. They may seem silly, but these strategies actually work. Just look at how CeraVe’s revenue grew 10x in the first five years after the acquisition. Starboard plans to tackle head-on the issues in its skin health and beauty business that appear to be the main obstacles preventing Kenview from creating significant shareholder value. There is no doubting the strength of Kenvue’s brand and products in this area. This is highlighted by two shining stars, Neutrogena and Aveeno, which are still highly regarded and widely purchased. A better marketing plan should not only increase the Skin Health and Beauty division’s sales, but also improve its operating margin, which is currently 12%, compared to a median of 17% for its peers.
Kenvue already appears to be moving towards this business model, with advertising expenses increasing to 11.1% of sales in FY24 (versus 8.7% in FY23). This budget increase reflects a shift towards a “marketing first” approach, particularly through social media, as evidenced by the recent launch of the Neutrogena Collagen Bank product. The company first introduced the product on TikTok before distributing it in stores. They then partnered with Hailee Steinfeld, a huge celebrity who currently has over 25 million social media followers, to become the face of the product. Finally, the company introduced this at the beginning of the collagen bank beauty trend.
There are two extremes as far as activist campaigns are concerned. There are very difficult campaigns in which activists are participating calling for an overhaul of boards, capital allocation, management teams, and operations. Then there’s the “Promoting Open Doors” campaign. This is a situation where activists and companies work together, there is a clear path to value creation, and the engagement is constructive. No matter how you look at it, this situation is the latter. Kenvue has an iconic brand and a strong business, but one division is underperforming: skin health and beauty. Starboard believes it can remedy this by embracing a marketing-driven culture, and it’s already doing so. Management is committed to prioritizing marketing. They have already started promoting a marketing-first mindset by ramping up their social media campaigns and celebrity partnerships. Starboard has not publicly requested board representation and expects to monitor Kenview’s progress as an active shareholder before making any decisions in this regard. However, the company does not have much time to nominate directors, as the nomination period runs from November 11th to December 11th. Starboard may appoint some directors just to protect its rights while it consults and monitors management. 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 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.
