How Starboard Activist Can Help Value Kenvue’s Skin & Beauty Business – NBC New York

Company: Kenvue Inc (KVUE)

Business: Kenvue is a consumer health company. The company operates through three segments: Personal Care, Skin Health & Beauty, and Essential Health. Self-care product categories include pain care; cold allergy cough; and “other self-care.” Product categories of the Skin Health & Beauty segment include Face & Body Care and Hair, Sun & Other. Product categories of the Essential Health segment 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 regions consist of North America, Asia Pacific (APAC), Europe, Middle East and Africa (EMEA) and Latin America (LATAM).

Scholarship value: $43.36 billion ($22.64 per share)

Activist: Starboard Value

Property: N/A

Average cost: N/A

Activist Commentary: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has had 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 operating thesis as part of its activist campaign and returned an average of 36.19% versus 15.29% for the Russell 2000 over the same period.

what is happening

On October 21news broke that Starboard Value had taken a position in Kenvue. The firm believes there is an opportunity to improve revenue growth and margins in the Skin Health & Beauty segment.

Behind the scenes

Kenvue is a consumer health company specializing in personal 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 2023which by all accounts seemed like a smart management move because the consumer health sector lacked synergies with J&J’s core pharmaceutical and medical technology competencies. Coupled with the fact that consumer health was only 16% of total sales for J&J before the spin-off, it was hard to argue against the merit of this separation now allowing a separate company to prioritize these great brands and businesses.

At a glance, after the spin-off, the company looked poised to flourish. It has stronger brand recognition than peers such as Colgate-Palmolive, Haleon and P&G. It also faces less threat from private label alternatives than peers, with private labels accounting for just 6% of Kenvue’s product categories, compared to a peer average of 10%. In addition, Kenvue operates in highly attractive end markets with structural tailwinds, including an increasingly health-conscious consumer and a growing middle class in emerging markets, which provide a solid foundation for revenue growth with a low to medium figure. Despite its attractive market position and superior brand quality, the company has traded weakly since its launch, with the lowest valuation multiple of its peers at 18 times – stunningly lower than the median 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 organic growth in a way it seems it didn’t expect. The company missed post spin FY23 guidance for organic growth by 75 basis points, even after previously cutting its guidance by 25 basis points. Kenvue expects a compound annual growth rate of 3.3%, compared to a median of 4% for peers. This is not a huge difference, but a problem that can be easily identified and fixed. Self Care delivered a strong year of organic growth of 8.4% and Essential Health grew ahead of expectations with organic growth of 3.6%, so these sectors are not the problem. The challenge for the company lies in Skin Health & Beauty, which saw organic growth of just 1.8% despite peer growth of 4.4% from CY19-CY23. If you were to take skin health and beauty out of the picture, Kenvue’s FY19-FY23 organic growth would have been 5.1%, significantly outpacing the consolidated market growth of 4%.

Starboard’s path to value creation requires management to adopt a “marketing first” strategy and embrace omnichannel 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 businesses 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 highly focused digital marketing campaign that included iconic advertising materials such as the “spirit”Michael CeraVeAlthough it may seem strange, these strategies really work: just look at the increase in sales of CeraVe 10 times in the first five years after the purchase. Starboard plans to address issues with its Skin Health and Beauty business, 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 – which remain highly regarded and widely purchased. A better marketing plan will not only increase the top line at Skin Health and Beauty, but should also improve operating margins, which are currently 12% versus an average of 17%.

Kenvue already appears to be making strides towards this business model as it increased ad spend for FY24 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 their recent launch of the Neutrogena Collagen Bank product. First, the company introduced the product on TikTok before the in-store distribution. Then, he partnered with major celebrity Hailee Steinfeld to be face of the productwho currently has over 25 million followers on social media. Finally, the company introduced it to the first innings of the Collagen Bank beauty trend.

When it comes to activist campaigns, there are two extremes. There are herculean, hard-hitting campaigns where the activist steps in forcefully for a complete overhaul of the board, capital allocation, management team and operations. Then there’s the “pushing open door” campaign—situations 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 skin health and beauty segment. Starboard believes this can be remedied by adopting a marketing-based culture, and this is already happening. Management is committed to prioritizing marketing. They’ve already started pushing a marketing-first mindset with increased social media campaigns and celebrity partnerships. Starboard has not made any public request for board representation and we expect them to monitor Kenvue’s progress as an active shareholder before making any decisions on this. However, the firm doesn’t have that much time to waste as the director nomination window is between November 11 and December 11. Starboard may nominate some directors only to preserve its rights while discussing with management and monitoring. progress.

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