Kylie Jenner has sold a majority stake in her beauty empire to Coty Inc. in a deal that values the company at about $1.2 billion.
For Coty, the deal grants access to Gen Z — for Kylie Cosmetics, Coty brings global potential, said Coty chief executive officer Pierre Laubies in an interview with WWD.
“What is special about her is that her social reach is bigger than her business reach…what a global partner like Coty can bring, it can bring the brand to full potential,” Laubies said.
“This transaction is part of closing our strategic gap. It will expose us to a more premium category, it will expose us to more growing categories and give us the opportunity to do something that we are good at, which is to build global brands,” Laubies said.
Jenner has 151 million Instagram followers, and built up her brand quickly by talking directly to her fans about product launches. For the most recent 12 months, the brand is said to have done $177 million in net sales, up 40 percent from the prior year, with a 25 percent earnings before interest, taxes, depreciation and amortization margin. Laubies said the collective business is expected to be at close to $200 million in sales for 2019, with Kylie Skin contributing $25 million.
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WWD first reported in June that Coty was considering the deal.
“What we are really interested [in] is not only the media reach that she has, but also the fact that she’s appealing to a younger audience….This is also the part of the market that is growing the fastest today, and we believe that’s going to be one of the driving force[s] to make this brand stay the test of time,” Laubies said.
He said buying the stake in Kylie Cosmetics— which Coty is doing through paying $600 million for a 51 percent stake in a joint venture — is part of the Coty’s broader efforts to turn itself around. Step one was evaluating the business, step two was the strategic review, including the decision to consider selling the professional beauty division and Brazilian operations, and step three — where Kylie Cosmetics falls — is identifying growth opportunities, Laubies said.
But some Wall Street analysts are skeptical, and questioned the brand’s growth and purchase price on a call with management on Monday.
“The transaction is not cheap at 6.8 [times] trailing 12-month revenues,” said Wells Fargo analyst Joe Lachky in a research note. “This compares to the [six times] multiple that [the Estée Lauder Cos. Inc.] paid to acquire Too Faced in early 2017,” wrote Citi analyst Wendy Nicholson.
But Coty is betting on the business’ potential for international expansion, and voiced intent to broaden Kylie Cosmetics and Kylie Skin globally, using its expertise in research and development, manufacturing, distribution and go-to-market strategies in order to grow the brand. Jenner and her Los Angeles-based team will continue to focus on things like product development and social media, Laubies said.
“It’s part of the equation that Kylie and her team remain actively involved [in] the daily management of the brand and the daily management of the interface with her fans…followers, and the daily management of the media strategy, the media reach. They will lead also the creative work in terms of products, because we do think they have an angle here, and we want to benefit from it,” Laubies said.
He said Coty was interested in Jenner’s brand because of her massive social profile, as well as her ability to connect with Gen Z.
“A better understanding of Gen Z behaviors and of this target group can always be useful. We have brands that we have a great [array] of brands, and at the same time we are looking to keep them relevant,” Laubies said. Coty owns brands like Cover Girl and Rimmel and has the fragrance licenses for luxury brands like Gucci and Calvin Klein.
Coty plans to leverage Kylie’s direct-to-consumer success into more markets, Laubies added, and will take the brand further into retail. “This is a luxury business so we are not going to put it everywhere,” he noted.
Kylie’s explosive launch in 2015 started with lip kits. In its first 18 months of business, the brand did $420 million in retail sales, all through its own website. But since then, direct sales are said to have slowed, and the brand partnered with Ulta Beauty. There, it has been doing well, Ulta executives have said on several earnings calls, and it has been expanded both in terms of product range and door count.
Kylie has expanded category-wise too, both in terms of its makeup range and with the launch of Kylie Skin, which debuted earlier this year. She’s also filed trademarks for hair and baby products.
Going forward, Laubies said “priority categories” will be the ones where Coty can contribute — meaning fragrance, color cosmetics and skin care. “That’s what we want to focus on and we think this is where the action happens. This is the place where we can combine our capabilities,” he said.
Culture wise, Laubies described Coty and Kylie as a good fit.
“She is quite a hands-on person, and we are hands-on people. We are investors, she is an investor. We are action-oriented, and she’s action oriented. So, I think the cultural fit, it is there, and that’s probably the reason she decided to elect to work with us,” Laubies said.
For Coty, the deal comes as Laubies and the rest of the management team — who have now been in place for one year — continue to try to turn around the business. The company decided to sell off Younique, an investment made by the prior management team, and is evaluating the potential sale of its Professional and Brazilian businesses in order to focus more on fragrance, skin and makeup.
But numbers, particularly for the Consumer division, remain down. For the most recent quarter, Coty net sales dipped 4.4 percent. In the Consumer segment, specifically, which houses Cover Girl and Rimmel, sales dipped 13.5 percent.
Citi’s Nicholson expressed that Coty should be spending time fixing its core and paying down debt “which is among the highest leverage ratios in our coverage universe” at an about a six times debt-to-EBITDA ratio. She also voiced concern about the nature of celebrity businesses. “As with any celebrity beauty brand, and especially one where the celebrity is so young, we think the biggest risk to this acquisition by Coty is that Kylie loses interest in the beauty business, or that her social media presence and/or popularity fades,” Nicholson wrote in a note.
“They’re trying to buy growth,” said Stifel analyst Mark Astrachan. “You look at the portfolio in consumer and this is a logical move given the challenges they have to growth the business with the brands and mix they have.”
“The real test will become what can they make of it, and how can they find some synergies and help boost that brand and turn it into something that becomes a big growth driver for them,” said Coye Nokes, a partner in OC&C Strategy Consultants’ consumer practice.
For more from WWD.com, see:
Kylie Jenner Sells Majority Stake in Beauty Business to Coty