Kenvue, a unit of Johnson & Johnson's consumer health business.
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Company: 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. Self Care product categories include pain management; cough and cold allergy; and “other self-care.” The product categories of the Skin Health and Beauty segment include facial and body care as well as hair, sun and other products. Product categories in the Essential Health segment include oral care, baby care and other essential health products. 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, the Middle East and Africa (EMEA), and Latin America (LATAM).
Market value: $43.36 billion ($22.64 per share)
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Kenvue shares in 2024
Activist: Starboard value
Property: n/a
Average cost: n/a
Comment from activists: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has run a total of 152 activist campaigns in its history and achieved an average return of 25.02% over the same period, compared to 13.65% for the Russell 2000. In 51 of these situations, Starboard had an operating thesis as part of its activist campaign and achieved one over the same period average return of 36.19% versus 15.29% for the Russell 2000.
What happens
On October 21, it was announced that Starboard Value had taken a position in Kenvue. 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 healthcare company specializing in self-care, skin health and beauty, and essential health, with world-class brands representing 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 to be a smart move by management given that the consumer healthcare sector lacked synergies with J&J's core pharmaceutical and medical device competencies. Combined with the fact that consumer health represented only 16% of J&J's total revenue before the spinoff, it was hard to argue against the value of this separation, which now allows a separate company to prioritize these great brands and businesses.
At first glance, the company seemed poised to prosper after the company was founded. Brand awareness is higher than competitors such as Colgate-Palmolive, Haleon and P&G. The threat from private label alternatives is also lower than competitors, with private label accounting for just 6% of Kenvue's product categories, compared to the competition's median of 10%. Additionally, Kenvue operates in highly attractive end markets with structural tailwinds, including an increasingly health-conscious consumer and a growing middle class in emerging markets, providing a solid foundation for low- to mid-single-digit revenue growth. Despite its enticing market position and superior brand quality, the company has performed poorly since its inception, with the lowest valuation multiple among its peers at 18 – shockingly lower than the peer median of 25. As a result, since the IPO, the company has delivered a total return to shareholders of – 15%, compared to an average of 6% for shareholders over the same period.
Kenvue has struggled with its organic growth in ways it apparently didn't expect. The company missed its post-spin forecast for organic growth in FY23 by 75 basis points, even after it earlier cut its forecast 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 with 8.4% organic growth and Essential Health grew above expectations with 3.6% organic growth, so these sectors are not the problem. The challenge for the company is in the Skin Health and Beauty segment, which only achieved 1.8% organic growth despite its peers posting 4.4% growth from CY19 to CY23. Excluding skin health and beauty, Kenvue's organic growth would have been 5.1% in FY19-23, significantly outpacing the consolidated market growth of 4%.
Starboard's path to value creation is for management to adopt a “marketing first” strategy and utilize omnichannel and digital marketing. Skin Health and Beauty has proven to be a marketing company whose growth can be significantly boosted 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 is a strong example of this. After acquiring CeraVe for $1.3 billion, L'Oreal launched a hyper-focused digital marketing campaign that included iconic collateral such as the hilarious “Michael CeraVe” campaign. While it may seem silly, these strategies really work: just look at CeraVe's 10x revenue growth in the first five years after the acquisition. Starboard plans to address the Skin Health and Beauty issues head-on, as this appears to be the primary 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 valued and widely used. A better marketing plan will not only increase sales at Skin Health and Beauty, but should also improve operating margins, which currently stand at 12%, compared to a median of 17% for competitors.
Kenvue already appears to be making progress towards this business model, having increased advertising spend to 11.1% of revenue in FY24, compared to 8.7% in FY23. This budget increase reflects a shift towards a “marketing first” approach. approach, particularly through social media, as demonstrated by the recent launch of the Neutrogena Collagen Bank. The company first introduced the product on TikTok before distributing it in-store. Next, the company partnered with major celebrity Hailee Steinfeld to be the face of the product, which currently has over 25 million social media followers. After all, the company introduced it in the early days of the Collagen Bank beauty trend.
When it comes to activist campaigns, there are two extremes. There are Herculean, difficult campaigns where the activist calls 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 the engagement is constructive. From what we hear, this is the latter situation. Kenvue has a solid business with well-known brands and an underperforming skin health and beauty segment. Starboard believes this can be fixed by adopting a marketing-focused culture, and this is already happening. Management is committed to prioritizing marketing. They have already started pushing a marketing-first mentality through increased social media campaigns and celebrity partnerships. Starboard has not made any public requests for board representation and we expect they will monitor Kenvue's progress as an active shareholder before making any decisions in this regard. However, the company doesn't have that much time left as the director nomination window is between November 11th and December 11th. It's possible that Starboard will nominate some directors just to protect its rights while it talks to management and oversees 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, an investment fund that invests in a portfolio of 13D activist investments.