Coty Inc.’s numbers were sharply down because of integration distractions following the company’s merger with Procter & Gamble’s beauty business; executives say they feel confident about the combined business moving forward.
“Coty is a long-term story,” said Bart Becht, chairman of Coty Inc. “The combination of the two [businesses] means that a lot of people have new jobs in different locations at some point in time,” he said on Coty’s earnings call. “So that has clearly created a substantial level of distraction. People are not necessarily fully focused on the business for a period of time because they’re in transition, alternatively, they’re also helping out in the integration of the business.”
Coty reported a dive in profit for the first quarter because of the integration efforts surrounding its purchase of 41 beauty brands from P&G, which closed on Oct. 1. Coty shares were down almost 10 percent in midday trading, to $19.76.
Coty posted a 100 percent decline in net income and a 67 percent dip in adjusted net income, to $78.3 million. Net revenues were down 3 percent, to almost $1.1 billion. Adjusted earnings per share were 23 cents, below analyst consensus of 33 cents. The company reported its quarter without including the P&G beauty brands. The business continues to target total four-year synergies and working capital benefits of $750 million and $500 million respectively, with an adjusted EPS target of at least $1.53 for fiscal 2020.
Fragrances posted a 10 percent drop to $492.6 million from the prior-year quarter’s $548.1 million. Gains in Chloé and Davidoff were not offset by declines in celebrity and mass fragrances, as well as lower Calvin Klein sales. The unit’s operating income dipped 12 percent to $105.7 million from $119.8 million in the prior-year period.
The Calvin Klein fragrance business has struggled because of broad changes at Coty, Becht said, but the business is also working on “systematically reducing wholesale inventories” in order to improve the brand, which is also dragging numbers down, he said. Looking forward, Calvin Klein is launching a new fragrance under the CK1 line, called CK All, according to Coty chief executive officer Camillo Pane. “It’s the first step to rebuild momentum in the Calvin Klein brand,” he said, adding the “all” part starts for “gender equality.”
“In the fashion house now there is somebody like Raf Simons who is an absolute icon and genius in the fashion world,” Pane said. “We believe we can be truly synergistic in fashion…that to me, is another area of strength in the brand.”
Other new fragrance launches are coming from Gucci, which is launching Absolute, a men’s fragrance, and Hugo Boss, Pane said.
Coty’s color cosmetics division was also down 10 percent for the quarter, to $352.7 million from $390.9 million. The business had a 1 percent negative impact from the divestiture of the Cutex brand, which was acquired by Revlon, and a 6 percent dip from Sally Hansen, which has suffered from a “double-digit decline in the U.S. retail nail market,” Coty said. Operating income was down 36 percent to $39.9 million from $652.1 million in the prior-year period.
Sally Hansen just launched a new line called Color Therapy, a combined nail care and color product set that industry sources have projected could bring in $80 million within its first 18 months.
“We see consumers now that go to the salon more,” Pane said, adding that has affected the overall nail business. “We are very happy with the launch, the launch has been very well-received…we believe that talking about care and not just color is the right thing to do, and we are a brand at Sally Hansen that is rooted in care…is one innovation enough to generate a reserve trend in the market? I think we need to work hard and address several areas.” Innovation is an area that Coty and Sally Hansen remain committed to, he said.
At Rimmel, a new mascara technology and new, more moisturizing matte lipstick is in the works, Pane said.
Skin and body care declined 7 percent to $161.9 million from $173.3 million in the prior-year period. Gains at Philosophy were offset by declines at Adidas and Playboy. Operating income was up 36 percent to $14.5 million from $10.7 million in the prior-year period. Coty’s acquisition of Hypermarcas added $73 million in revenues for the quarter, with adjusted operating income at $6.3 million.
The company still intends to divest 6 to 8 percent of its portfolio on a revenue basis, according to Becht, who added that the company has a list of brands it wants to shed and expects to announce something material by the end of fiscal 2017, in June. He declined to comment on which brands would be sold and if it would be separately or as a group. “We are entertaining different options,” he said. “[It’s] just too many brands to manage through one organization and it is not like the bad brands, we just need to increase our focus,” he said.