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Coty Sets Six-Pronged Growth Plan

Michele Scannavini kicked off the beauty firm’s first earnings call as a public company with a plan for the future.

NEW YORK — Coty Inc.’s Michele Scannavini kicked off the beauty firm’s first earnings call as a public company with a plan for the future.

This story first appeared in the September 18, 2013 issue of WWD.  Subscribe Today.

Coty, which narrowed net losses in the fourth quarter, has a six-pronged plan intended to drive profitable growth, Coty chief executive officer Scannavini told analysts Tuesday.

The plan includes maximizing the growth potential of Coty’s 10 power brands with “superior innovation;” strengthening the company’s position in fragrance and color cosmetics, while expanding its skin- and body-care business; growing its emerging-markets business to account for one-third of Coty’s revenues within five years, up from one-fourth currently; leveraging its multidistribution strategy to cover all price points; continuing to grow margin through supply-chain productivity, and generating sustainable and profitable growth through improved earnings and capital reduction.

He referred to fiscal 2013 as “another positive year for Coty,” and reminded analysts of the company’s past track record. “We have delivered sustained revenue growth and margin expansion over the last 10 years,” he said.

For the fourth quarter ended June 30, net losses attributable to Coty narrowed to $62.3 million, or 16 cents a diluted share, compared with a net loss of $357.3 million, or a 95 cents a share, in the same quarter a year ago. Adjusted net income, which excludes nonrecurring items, including Coty’s share-based compensation expenses when it was a private company, was $9.9 million, or 3 cents a share.

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Net revenues for the three-month period gained 3.9 percent to $1.06 billion, compared with $1.02 billion.

By category, during the quarter fragrances gained 6 percent to $490.4 million, color cosmetics was flat at $385.1 million, and skin and body care increased 6 percent to $183.3 million.

Coty said its color business was impacted by an abrupt slowdown in nail-care sales — which had been humming along at a robust double-digit clip for the past several years — in June and July. In the mass market, nail polish sales rose 19 percent for the 52-week period ended May 19, compared with gains of 24.8 percent for full-year 2012, according to SymphonyIRI Group. The company said the mass-market nail-care category declined 2.5 percent in July, prompting retailers to quickly cut inventory prior to the back-to-school selling season.

Scannavini said, “I was not expecting nail to grow at 20 percent for years to come.…It was bound to slow down, but nobody expected such a drastic drop.” Scannavini, noting that its Sally Hansen brand was hit hardest by the about-face by retailers, said, “When you are the leader in the category, you are the one who pays the most in terms of de-stocking.” He forecasted that over time the nail-care category — where two of Coty’s 10 “power brands” play, namely Sally Hansen and OPI — may grow more in line with the total color cosmetics category at a rate of 3 to 4 percent.

Citing the entrance of a host of new brands and heightened investment in the category, he said, “We are focused on innovation that can put us one step ahead,” and named the upcoming Sally Hansen launch Triple Shine in particular. Following the call, Scannavini said Sally Hansen has no plans to “downsize” the launch of Triple Shine based on retailers’ recent spate of de-stocking. He emphasized that nail care is still a “hot category” and that he hopes the recent falloff was “more of a blip than a trend.”

The company said that de-stocking by U.S. mass retailers, as well as macroeconomic conditions in Europe, could somewhat hamper net revenue in the first quarter of fiscal 2014.

Turning to the year ended June 30, net income attributable to Coty was $168 million, or 42 cents a diluted share, compared with a loss of $324.4 million, or 87 cents a share, in the prior year. Adjusted net income for the year was $323.2 million, or 82 cents a share.

Net revenue was $4.65 billion, up 0.9 percent from $4.61 billion.

By category, fragrances gained 2 percent to $2.49 billion, and color cosmetics increased 3 percent to $1.47 billion, while skin and body care declined 5 percent to $689.9 million. Scannavini said that for the year, fragrances accounted for 54 percent of the business, driven by brands such as Marc Jacobs, which grew at a double-digit rate for the fourth year in a row; color cosmetics accounted for 31 percent, boosted by Rimmel’s double-digit growth, and the skin- and body-care category accounted for the remaining 15 percent.

Scannavini said the company is making progress on putting Philosophy back on the growth track. In fiscal 2013, the brand expanded to several Anglo-Saxon countries, including the U.K. and the Netherlands, Belgium and Luxembourg. It’s also rolled out to Singapore, South Korea and Hong Kong to test how the whimsical skin-care brands plays in Asia. He noted that the brand’s new leadership team — which includes Marc Rey, president of Coty Prestige U.S. and regional vice president of Coty Prestige North America, and Jill Scalamandre, senior vice president of Philosophy and Coty Prestige Skin Care — brings a strong understanding of the global skin-care market. The company is relocating Philosophy’s commercial and marketing teams and research and development functions from Phoenix, where they are currently based, to New York and Morris Plains, N.J., where Coty operates an R&D facility.

Scannavini said Philosophy began introducing the first products for its new innovation program in the second half.

During the call he told analysts, “Innovation is the engine that will continue to differentiate us and drive our growth.”