Coty Tumbles After Purchase of P&G Brands Brings Challenges

(Bloomberg) -- Coty Inc.’s rise from relative obscurity to cosmetics giant is getting off to a rough start.

Shares of the company tumbled as much as 9.6 percent on Thursday after quarterly earnings missed analysts’ estimates, hurt in part by the challenge of integrating more than 40 makeup brands from Procter & Gamble Co. The $12.5 billion acquisition of the products, completed last year, turned Coty into the world’s third-largest cosmetics seller.

There’s more inventory in the retail channel from the acquired business than the company expected, weighing on results. And broader weakness in color cosmetics -- a category that includes eye shadow, lipstick and other makeup -- also hurt sales. Excluding some items, profit was 30 cents last quarter, missing the 34-cent estimate predicted by analysts.

The stock fell as low as $18.12, marking the biggest intraday decline in three months. The plunge wiped out Coty’s gains for 2017: The stock had been up 9.4 percent this year through Wednesday.

Coty, whose brand roster includes CoverGirl makeup and Gucci fragrances, is now looking to streamline its portfolio. The New York-based company has identified brands that aren’t core to its business and may divest them, Chief Executive Officer Camillo Pane said. It also plans to increase product innovation and step up digital advertising, part of an effort to reach younger consumers.

Sales in its consumer-beauty division, which includes color cosmetics, fell 11 percent. They declined 4 percent at its luxury business, which focuses on prestige fragrances and skin care. Revenue at the professional-beauty unit, which includes hair and nail items for salons, fared better. It rose 14 percent.

Coty reiterated that it will generate $750 million in savings by fiscal 2020 and will continue to make acquisitions to strengthen its portfolio.

The P&G purchase was a complex transaction conducted as a Reverse Morris Trust, meaning P&G broke off the business before it was merged with Coty.

To contact the reporter on this story: Stephanie Wong in New York at swong139@bloomberg.net. To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net.