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Coty Team Talks M&A, ‘Sensible’ Retail Plans

The business plans to exit Younique.

Coty Inc. is “moving at pace” in terms of divestitures, according to chief financial officer Pierre-André Terisse. 

The owner of CoverGirl and Wella said Wednesday it is getting out of the multilevel marketing business by selling its 60 percent stake in Younique, which it bought in 2017, back to the company’s other shareholders. 

In an interview on Wednesday morning, Terisse said shedding Younique will allow Coty to focus its energies on the other business units. 

“Younique has been facing its own cycles, let’s put it this way, which is the multilayer marketing business goes through rapid expansion and then often a phase of stabilization or decline before it can grow again,” Terisse said. “We’ve been in this phase of decline for the past few quarters now. This needs to be addressed, and the current management team has the competence, and on one end, we need to focus on our business. We have businesses with strong issues…but also strong opportunities. Luxury’s growing fast — we need to continue fueling it.”

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According to Citi analyst Wendy Nicholson, Younique had $358 million in sales for fiscal 2019, making up about 4 percent of total Coty sales and 10 percent of Consumer division sales. “While Younique had grown nicely initially after Coty acquired it, more recently, the business has struggled considerably,” Nicholson wrote. The company had $16 million in operating income for the year, management said on a call with Wall Street Wednesday.

“We assume proceeds will be less than the $600 [million] Coty paid in February 2017,” wrote Wells Fargo analyst Joe Lachky in a note.

Terms of the exit were not disclosed. Terisse noted that Coty did glean digital learnings from the investment in the business. 

WWD reported that Coty is said to be considering divestitures as part of its turnaround plan in July, a few weeks after the company’s plan was disclosed. One source said the company is trying to shed between $500 million and $1 billion in assets. 

Asked directly if divestitures would be used as part of the company’s plan to de-lever, Terisse said Coty doesn’t comment on M&A and will use profitability improvement and an increase in free cash flow to reduce the company’s leverage ratio by 2023.

“Beyond that, we believe we have opportunities to improve our portfolio, and improving our portfolio will mean investing and divesting, but this is something we look at with no hurry, no program, no rush and no preconceived ideas,” Terisse said. “That’s a job we need to do in the coming four years progressively, and [not] rushing with a divestiture program.” 

[See: Coty Said Considering Divestitures As Part of Turnaround]

Terisse and Coty chief executive officer Pierre Laubies spoke to WWD surrounding Coty’s latest financial results. Numbers were still down, except for in the Luxury division. 

Laubies said since the two joined the business eight months ago, they have been able to handle their priorities — stabilizing the business, resolving supply chain issues, regaining control of profitability and cash flow and setting “relevant financial policy” — and that now, Coty is moving onto phase two.

“The second task we have given ourselves is how to make the business we have today perform better,” Laubies said. “We have built detailed operational growth plans for 50 percent of our business. We are presenting these plans to our customers and we are getting good feedback.” 

For the Consumer division, retail partners are finding Coty’s strategy “sensible,” Laubies said. “Sensible [is] addressing the right things and the right issues, focusing on building brands, focusing on the quality of our assortment to improve our performance in stores and their performance of their stores.

“I can confidently say the people to who we have presented these plans are saying, ‘yeah, that’s exactly what needs to happen,’” Laubies continued. “We are working at pace, but we are not taking shortcuts.”

He declined to get into specific strategies for the Consumer brands, but did note that Coty is weighing a potential international expansion for CoverGirl, which he said is mainly in the U.S. and Canada. 

“It’s one of the key power brands, and our objective is fundamentally to continue to build it and strengthen it. The strategic question that we have is clearly, ‘what do we do with it internationally?’” Laubies said. “It is a brand that we believe has global potential, except we have two brands in about the same type of portfolio structure because we have Rimmel and CoverGirl — they don’t have the same brand positioning, but they occupy the same pricing level into the marketplace, and we need to decide which one goes where.”

Coty has data that shows when it removes stockkeeping units, volume gets transferred to the best-seller, improving productivity, but that it will do so in a “guarded” manner, executives said on the call. Coty is also ramping up advertising behind some of its brands.

Both of those brands are part of Coty’s Consumer operation, which has struggled since the company acquired the brands from Procter & Gamble in 2016. Net sales dropped 17.1 percent for the fiscal year, to $3.5 billion, in the segment. In the fourth quarter, revenues were down 15.2 percent, to $902.4 million. Coty said the declines were because of continued weakness in mass beauty in North America and Europe.

[See: After Shake-ups, Can Coty Management Team Turn the Business Around?]

That dip contributed to Coty’s overall 8 percent decline for the fiscal year. The company posted $8.6 billion in net sales, with a net loss of nearly $3.5 billion and diluted loss per share of $5.04. For the quarter, Coty also posted an 8 percent dip in net sales, to $2.1 billion. Net loss was nearly $2.8 billion, with a diluted loss per share of $3.72.

In early-morning research notes, several Wall Street analysts noted the company’s improved operating margins. “Management seems to have a handle on the business and is starting building credibility with investors,” wrote RBC analyst Nik Modi.

The business recorded $3.85 billion in impairment charges for the fiscal year, including nearly $3.4 billion related to the Consumer beauty division and $429 million related to trademarks for Consumer beauty brands, as well as Philosophy and Wella.

Philosophy “has not been performing at the level we expected,” Terisse said. 

For the year, Luxury posted a 2.6 increase in net sales, to nearly $3.3 billion. For the quarter, the segment posted a 1.7 percent increase, to $754.7 million. Those sales were driven by Burberry, Calvin Klein and Gucci, supported by launches including Burberry Her, Gucci Guilty Revolution and Gucci’s new Alchemist Garden lipstick collection. In fiscal 2020, Gucci has two launches planned, including one called Memoir, Terisse said on the company’s earnings call.

The Professional division, which had been doing fairly well since Coty bought it from Procter & Gamble, posted declines for fiscal 2019. For the year, the unit’s net sales were down 5.4 percent, to $1.8 billion. In the fourth quarter, net sales fell 7 percent to $458.3 million. Part of the drop was because of supply chain disruptions that have since been fixed, and pressure in North America, the company said. Coty’s management team noted there was a onetime decrease in the level of inventory that also impacted sales. 

“The underlying performance of the brands is healthy,” Terisse said, noting that GHD is doing well and Coty sees continued potential for OPI.

“We are today focusing our organization on the execution of our recipe. We are in deployment mode, and at the same time, we are also now focusing on how to create growth in the future, which means we have an innovation pipeline — it’s good, but we want to strengthen it. That’s going to be the task going forward. We want to make sure we have a pipeline that has value…and delivers capabilities, and has the capability to increase the penetration of our brands,” Laubies said.

Coty’s stock price was trading up about 5 percent in morning trading.

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