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Could Coty’s Turnaround Succeed in 2021?

"She arrived on the scene and went, 'What have you guys been doing for the last five years?'"

Is 2021 the year Coty Inc. finally turns around the business?

The company has struggled since it bought 41 beauty brands from Procter & Gamble in 2016. Many of those brands showed up in rough shape, and Coty executives struggled to fix them. At the highest levels, Coty executives also struggled to keep their jobs — the company has had a revolving door of chief executive officers that lacked beauty experience for years.

Now, Coty has Sue Nabi, a L’Oréal veteran with decades of beauty experience who plans to center the business around making good products that can sell well online. Nabi took the helm as CEO in September. Already, green shoots are appearing.

For the first time in five years, Cover Girl didn’t lose shelf space in major U.S. retailers in the latest quarter. The brand — one of the ones that arrived to Coty in rough shape — has a new plan to focus on bringing clean makeup to the mass market.

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Sally Hansen, too, is said to have fared well with the launch of Good Kind Pure vegan nail polish during a period where most consumers have stopped going to nail salons and started painting their own nails at home.

And while analysts have voiced skepticism around the globalization potential of Coty’s partnerships with the Kardashian-Jenner clan, Nabi has big plans for both Kylie Cosmetics and KKW Beauty that include leaning into skin care, improving the products and blowing out both brands online. Already, Kylie Skin has launched a handful of international e-commerce sites and did $25 million in net sales in the latest quarter, and KKW’s skin-care line is set to launch in fiscal 2022.

Right now, only 13 percent of Coty’s business is done online, which leaves significant space for expansion. “The company plans to continue investing in its [direct to consumer] backbone and the mandate of its new chief digital officer is to build out the company’s dtc functions,” said Citi analyst Wendy Nicholson in a note. She added that beyond the Kardashian-Jenner lines, Coty may also expand Philosophy and “digitally gifted” brands like Gucci and Burberry online.

At the same time, Nabi is leading a business that is leaner, as deals to divest certain assets have closed.

KKR is now the majority owner of OPI, Wella and problem-child Clairol, though Coty does still have a minority position in the joint venture. The company plans to use $2.5 billion in cash proceeds to pay down debt, and would consider selling its remaining position in the future, which would “provide an opportunity to further decrease leverage,” according to Citi analyst Wendy Nicholson.  Coty is also free of its position in Younique, a multilevel marketing brand that former CEO Camillo Pane bought 60 percent of in 2017 that had next to nothing in common with the rest of Coty’s business.

“Sue has come in with a very clear agenda, and that’s to say, let’s take the best of the brands that we have and let’s align with the logic of successful organizations in the industry and let’s create a pretty simple Venn diagram and let’s go after it,” said Jefferies analyst Stephanie Wissink.

“She arrived on the scene and went, ‘What have you guys been doing for the last five years?'” Wissink noted. “She started asking some really important strategic questions and I don’t think anybody had any really clear answers, which essentially was a signal to her — let’s map a plan, let’s start acting on that quickly.”

Nabi’s speed has allowed the people who work at Coty to start realizing some small victories, Wissink said, which is what most of the other major beauty players have done to succeed in their businesses.

“Coty has lacked the small victories that motivate people to keep taking risks,” Wissink said. “One thing behind the Sue Nabi-CEO facade is her instinctual abilities to create small victories, which are incredibly motivating.”

That is a departure from other Coty management teams who have instead tried for big “home runs,” Wissink said. “In an industry that’s anchored in innovation and change and risk taking, you need small victories continuously.”

Coty’s latest numbers beat expectations, and showed signs of improvement. If the company can keep doing that and “show directional improvement at an accelerating rate or magnitude” it would indicate, according to Wissink, the beginnings of a true turnaround.

That could start as early as this year, she said, because of the combination of a low baseline, low expectations and low-hanging fruit. Cover Girl’s hold on its shelf space is already a step in the right direction, Wissink said.

“You go from fighting against a really difficult headwind to taking away the headwind. Can you actually deliver improvement, without the headwind?”

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