Coty Slides as Turnaround Plan Comes With $3 Billion Writedown

(Bloomberg) -- Cosmetics maker Coty Inc. will take a $3 billion writedown -- about a third of its market capitalization -- 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 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,” Chief Executive Officer Pierre Laubies said on a call following the announcement. “The percentage of brands that are margin dilutive is just too high.”

Shares fell as much as 13% in New York as of 10:33 a.m., the most intraday since November.

Coty is feeling pressure to make a change. Earlier this year, it took a $965 million writedown on the value of the brands it agreed to purchase from Procter & Gamble Co. 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 $3 billion dollar impairment is a confirmation that they realize some brands have suffered beyond recovery,” said Bloomberg Intelligence analyst Deborah Aitken. “A $3 billion writedown of underperforming brands, which follows a recent near $1 billion writeoff, won’t be the end-game in the vulnerable consumer mass-beauty segment.”

What Bloomberg Intelligence Says

“Coty’s profitable sales growth recovery is no quick fix, underscored by its guidance for a modest reduction in adjusted operating income.”

-- Deborah Aitken and Maxime Boucher

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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.” Management had previously been in London. The spokeswoman said the corporate headquarters will stay in New York.

It didn’t specify if the restructuring would include job cuts, but the company said it would be “reducing organizational layers,” which could mean as much.

A spokeswoman for the company declined to comment on whether there would be job cuts. She said about 20 brands would be getting more attention under the plan. A company slideshow said Wella, OPI, Max Factor and Covergirl would be among the brands getting a bigger focus.

Laubies, who took over from Camillo Pane in November, seeks to move Coty back into growth with the four-year turnaround plan. Next fiscal year, Coty expects a moderating decline in net revenues and better free cash flow. Longer term, it’s targeting three big things by fiscal 2023: operating margins of 14% to 16%, $1 billion in free cash flow and reducing its net debt-to-EBITDA to less than four times.

‘Ambitious’

Laubies appears to have the support JAB Holding Co., which increased its stake in Coty to about 60% earlier this year. The expanded presence of JAB, which is the investment vehicle for the billionaire Reimann family, may give Coty more flexibility to carry out bigger changes at the company.

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 its goals. The company has “ample liquidity” and credit lines of more than $2 billion.

--With assistance from Janet Freund.

To contact the reporter on this story: Olivia Rockeman in New York at orockeman1@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Jonathan Roeder

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