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Coty Links With Avon Brazil as Profits Rise

Two years after the firm's failed bid for Avon Products Inc., the two companies have found a way to do business with each other.

Two years after Coty Inc.’s failed bid for Avon Products Inc., the two companies have found a way to do business with each other.

This story first appeared in the May 15, 2014 issue of WWD.  Subscribe Today.

Coty and Avon Brazil on Wednesday finalized a distribution agreement in which select Coty fragrances will be sold through the direct seller’s 1.5 million sales representatives in the country. Coty fragrances are expected to appear in Avon Brazil brochures by the holiday selling season. The two companies signed a letter of intent in February.

“[The deal] will give us penetration with our fragrances in the most important market in the world for fragrances,” Michele Scannavini, Coty’s chief executive officer, told Wall Street analysts during the firm’s third-quarter earnings call on Wednesday. He said Avon will distribute and sell select fragrances in Coty’s portfolio, and that the scents will be manufactured locally by a third-party manufacturer. Scannavini noted that Coty’s current agreement with fellow Brazilian direct seller Jequiti Cosméticos will expire once Avon begins distributing its fragrances.

The distribution deal with Avon is part of Coty’s efforts to expand its business in emerging markets, which gained 15 percent in the quarter, according to the company. Coty is also ramping up investment behind its 10 power brands, with Marc Jacobs fragrance, Sally Hansen nail care and Philosophy skin care among them.

“We need to invest more behind our brands to ensure they are growing in-line or faster than the market in which we compete,” said Scannavini.

On Wednesday, the company reported adjusted net income of $86.7 million, or 22 cents a diluted share, compared with $68.4 million, or 17 cents a share, driven by an increase in one-time tax benefits of $14.3 million.

The beauty firm’s revenues gained 1 percent to $1.01 billion from $997.7 million in the year-ago period on a reported basis, and were up 2 percent like for like.

By category, fragrance sales in the quarter gained 4 percent in constant currency to $508.1 million, or 6 percent like for like, color cosmetics sales declined 6 percent in both constant currency and like for like to $344.9 million, due in part to a slowdown in nail-care sales, while skin- and body-care sales gained 8 percent to $155.7 million.

Looking ahead, Scannavini promised a strong new product pipeline for the first half of 2015, which will include among other initiatives the introduction of an antiaging line from Philosophy called Nothing to Hide. He noted the Philosophy brand is making progress, and said the third quarter marked the fourth consecutive three-month period of “solid growth momentum” for the skin-care brand.

The company dealt with a slowdown in the U.S. market across mass and prestige in the quarter. “Overall the situation in the U.S. market is rather static, if not declining,” said Scannavini, adding the company has “no visibility for when the mass channel will improve.”

He cited several factors for the abrupt slowdown in the mass market, including severe weather in January and February, less foot traffic in stores and a highly promotional retail environment. That said, Coty’s net revenues in the Americas declined 10 percent in constant currency to $382.2 million, or 9 percent like for like. Across the remaining regions, revenues in Europe, the Middle East and Africa gained 7 percent in constant currency to $499.9 million, or 8 percent like for like, and in Asia Pacific, revenues increased 19 percent to $126.6 million in both constant currency and like for like.

Asked by an analysts about Coty’s appetite for acquisitions, Scannavini said, “We are looking for a deal that can have a strategic fit with our growth objective and is financial accretive.” He added that the company aims to get even stronger in segments where it has a leadership position, such as fragrance and color cosmetics, and is interested in areas where it can improve its position, such as skin care and in emerging markets.