Coty slides as turnaround plan includes $3bn writedown
By Olivia Rokeman - Jul 2nd, 13:34
Cosmetics maker Coty will take a $3bn write-down as its aging mass-market brands face new competition from savvy upstarts in the booming beauty industry.
The company, under pressure to turn its business around as revenues stagnate, laid out the first steps of a turnaround plan on Monday intended to revive margins, reduce leverage and better keep up with its rivals. Coty — which acknowledged a stunning 60% of its brands are “margin dilutive” — plans to simplify its management structure and concentrate on a fewer number of product lines. It didn’t specify which — if any — brands might be on the chopping block.
“We are fundamentally going to simplify our portfolio,” CEO Pierre Laubies said on a call following the announcement. “The percentage of brands that are margin dilutive is just too high.”
The $3bn dollar impairment is a confirmation that they realize some brands have suffered beyond recovery.
Shares fell as much as 13% in New York as of 10.33am, the most intraday since November.
Coty is feeling pressure to make a change. Earlier in 2019, it took a $965m write-down on the value of the brands it agreed to purchase from Procter & Gamble in 2015, including Covergirl and Clairol.
Coty shares have lost more than half of their value since that deal was announced.
Meanwhile, rival cosmetics companies have been rapidly acquiring hot new brands as they search for the next big hit, often picking labels that attract younger, trendier shoppers.
“The $3bn dollar impairment is a confirmation that they realize some brands have suffered beyond recovery,” said Bloomberg Intelligence analyst Deborah Aitken. “A $3bn writedown of underperforming brands, which follows a recent near $1bn write-off, won’t be the end-game in the vulnerable consumer mass-beauty segment.”
As part of the turnaround plan, Coty will be divided into regional teams in Europe, the Middle East and Africa, Americas and Asia Pacific. The company’s management will move to a new headquarters in Amsterdam, which it called “a cost-efficient and tax stable location”.
It did not specify if the restructuring would include job cuts, but the company said it would be “reducing organisational layers”, which could mean as much.
Laubies, who took over from Camillo Pane in November, seeks to move Coty back into growth with the four-year turnaround plan. In 2020, Coty expects a moderating decline in net revenues and better free cash flow. Longer term, it is targeting three big things by fiscal 2023: operating margins of 14% to 16%, $1bn in free cash flow and reducing its net debt-to-ebita to less than four times.
Wells Fargo analyst Joe Lachky called Coty’s long-term targets for fiscal 2023 “ambitious”, noting that investors may have been looking for “larger portfolio changes, or a major M&A announcement”.
Coty said it reached an agreement with banks in order to meet these goals. The company had “ample liquidity” and credit lines of more than $2bn.
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