Divine Decadence by Marc Jacobs

Divesting some fragrance brands is likely to be in the cards for Coty Inc. as the company looks to focus on its larger licenses.

The company has a plan to divest or discontinue brands representing 6 to 8 percent of its net revenue and “a chunk of this will be in the fragrance area,” chairman and chief executive officer Bart Becht told WWD. “The more premium end of the market is the fastest-growing part of the market, this is also where we’re increasingly focused behind licensed brands, which will also be a focus going forward,” Becht said.

As part of Coty’s deal to buy 41 P&G beauty brands, the company will take over Hugo Boss and Gucci, among other licenses. In terms of core brands between both Coty and P&G, Coty plans to “nurture those much better with key pipeline initiatives and in-store execution,” Becht said on the company’s earnings call. “We’ll be focusing on our top brands, which are the brands like Gucci, Hugo Boss, Calvin Klein, Marc Jacobs, etc.,” he said.

When asked about potential interest in indie fragrances, Becht said: “Artisanal fragrance is an interesting niche, I’m not going to comment if this is something of interest to us.”

Becht’s thoughts on the fragrance category came as Coty reported a net revenue decline of 8 percent for its fragrances segment. Coty said 5 percent of that dip was negative impact of foreign currency, and 3 percent was from the underlying business, driven by declines in celebrity and mass fragrance brands, reflecting weakness in the mass fragrance market, and a lower level of new launch activity in select brands. Those losses were offset from growth at Marc Jacobs and a “strong launch” of the Miu Miu fragrance.

For the quarter, Coty reported a $31 million net loss, about a 100 percent year-over-year decline. Adjusted net income was $45.7 million for the quarter, a 6 percent gain. In its earnings report Coty notes that its adjusted performance measures have changed since the prior-year period to exclude the expense and tax effects associates with “amortization of acquisition-related intangible assets.” Integration costs are in line with what was expected, according to the company.

Net revenues for the quarter were up 6 percent to about $1.08 billion. Loss per share was down 9 cents. Adjusted earnings per share were 13 cents, above consensus of 6 cents.

For the year ended June 30, Coty posted $156.9 million in net income, a 33 percent year-over-year dip. For the 12-month period, net revenues dipped 1 percent, to $4.35 billion. Adjusted net income was up 19 percent for the year, to $485.2 million. Earnings per share were 44 cents, and adjusted earnings per share were $1.37.

The company is in the process of preparing to close the P&G deal — which is slated for October.

“What is good is that we are better positioned now from a capability point of view, now that we have largely decided how we want to structure the business,” Becht said, speaking about the P&G transaction. “We also have completed the staffing of the organization.”

After the deal closes, Camillo Pane will take over as ceo, Coty said in July.

“He has a very strong track record from a growth and a profit point of view,” Becht said, highlighting Pane’s time at Reckitt Benckiser before he joined Coty, heading up the global health care segment. “He’s strong, strategically good with people and a very strong operator,” Becht said.

Coty has appointed a handful of other executives, including Wella U.K. and Ireland managing director Daniel Minney as general manager for the consumer beauty division, and Alexis Vaganay from BIC as general manager of luxury. Andrew Kelsall has also been named general manager of professional beauty. Coty is adding Shannon Curtin, who boasts experience at Wal-Mart and Walgreens, on board as senior vice president North America for Coty consumer beauty. Simona Cattaneo, who was Burberry’s head of beauty, has taken over as chief marketing officer.

Becht highlighted some of Coty’s previous acquisitions as successful and indicative of the company’s integration capabilities. “The acquisitions, both Bourjois and Hypermarcas are doing very well, which is very encouraging,” he said. “It shows that we can integrate acquisitions properly and make it work.”

Bourjois was a highlight of Coty’s color cosmetics figures. The division reported a 7 percent increase in net revenues, driven by a 10 percent contribution from the Bourjois acquisition, a 5 percent negative impact from foreign currency translation and 2 percent growth in the underlying business, the company said. Rimmel and Sally Hansen had strong growth due to new launches and the international rollout of Sally Hansen’s Miracle Gel, the company said.

“The Bourjois acquisition, which closed in April 2015, has now reached profitability levels exiting the fiscal year consistent with the rest of our color cosmetics segment, while net revenues showed strong growth in the most recent quarter,” Becht said.

Skin- and body-care net sales dropped 10 percent for the quarter, with $693.4 million. Of that dip, 6 percent was foreign currency translation and 3 percent was from the business, driven by declines in Playboy and Philosophy, offset by growth at Adidas. Becht said that he expects Philosophy to have a better fiscal 2017, in part due to product innovations.

“I’m feeling good about the plan for Philosophy for this fiscal year,” Becht said.

Coty shares dipped about 5 percent to $28.28 Tuesday.

“Fiscal 2016 showed our continued progress in our strategy of building a healthier and better business,” Becht said in a statement. “In support of this strategy, we are actively preparing for the transformational merger with the P&G beauty brands business. During the year, reported revenues were positively impacted by our completed acquisitions, in line with our strategy, but negatively impacted by foreign currency. On a like-for-like basis, we drove net revenue growth in our power brands, on which we put disproportionate focus, outperforming the overall business. Reported operating and net income were lowered by acquisition-related costs. On an adjusted basis, we generated solid growth in profitability and margins, with growth in the full-year EPS.”

“Our acquisition of the digital marketing platform, Beamly, is contributing to a step change in our capabilities to digitally engage with our consumers. The Brazil acquisition, which closed in February 2016, is also showing strong revenue and profit momentum in its first full-quarter results, with the integration with Coty’s Brazil business expected to be completed by September 2016.”

“While it is premature to comment on the outlook for the combined business as the transaction has not yet closed, we continue our work on building a healthier and better Coty stand-alone business,” Becht continued.

Future mergers or acquisitions could very likely be in the cards for Coty going forward. “M&A is fundamentally not interesting unless we can grow the business from an organic point of view,” Becht said on the call. “We will complement our organic growth strategy with M&A when appropriate.”

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