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Flash Report

Coty Unveils Turnaround Plan

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Coresight Research

Key Points

On July 1, 2019, Coty announced a turnaround plan, designed to improve performance, especially in consumer beauty and to optimize its luxury and professional beauty businesses. The announcement also covers the financial outlook and provided information on management changes.

  • The plan focuses on three strategic pillars: rediscover growth, regain operational leadership and build a culture of pride and performance.
  • For FY20, Coty expects a moderating decline in net revenues, constant currency adjusted operating income to be up 5-10% and moderate improvement in free cash flow.
  • By FY23, Coty forecasts 0-2% growth in net revenue, an operating margin of 14-16% — and hopes to attain a leverage ratio of net debt to EBITDA below 4x by that year.

Coty announced a turnaround plan that aims to improve performance – especially in its consumer beauty segment, and to optimize its luxury and professional beauty businesses. The announcement also covers the financial outlook and provided information on management changes.

The plan focuses on three strategic pillars:

Rediscover growth: Coty will adjust its branding strategy and focus on 20 priority brands (including Gucci, Burberry, Rimmel London), and six blueprint countries (US, UK, Germany, Russia, Brazil and China) to grow net revenue. The company hopes to increase priority brand-country combos from 20% if its total portfolio to 60% by FY23. Coty expects net revenues could offset declines in the rest of its portfolio.

Other strategic solutions include: improving shelf productivity by better assortment, driving better mix management through improved portfolio structure and innovating to support expansion.

Regain operational leadership: Coty will optimize its supply chain through COGS savings, by rationalizing SKUs and sub-ranges to reduce product range complexity and cutting fixed costs with a new organizational structure. Coty expects to create regional commercial teams in Europe, EMEA, Americas and Asia Pacific, and brand marketing units for luxury and consumer beauty. Numerous management changes have also been announced to support team expansion.

Other strategic solutions include: simplifying the organization to establish a more efficient, lean team and fostering greater cooperation among teams.

Build a culture of pride and performance: Coty will seek to create a culture that “balances discipline and creativity as well as fosters team spirit and engagement.” To achieve this, Coty will move executive team and corporate functions to Amsterdam, a cost-efficient and tax-stable location that is close to Coty’s main markets.

Coty’s three pillars in the turnaround plan
Source: Coty’s presentation slides

 

For FY20, Coty expects the decline in net revenues to moderate; constant currency adjusted operating income to be up 5-10%; and, a moderate improvement in free cash flow.

By FY23, Coty forecasts 0-2% growth in net revenue and an operating margin of 14-16%. And the company aspires to attain a leverage ratio of net debt to EBITDA below 4x by that year.

Coty is now completing annual testing for impairment based on the turnaround plan and expects to generate an impairment loss of intangible assets of approximately $3 billion. To fund the turnaround, the company will set aside about $600 million one-time costs over FY2020 through to FY2023.

Coty also mentioned it underestimated the financial setback of the P&G Beauty merger (completed October 3, 2016). Now, the company can set more realistic targets as the integration is complete, with IT systems and business operations in order.

Coty will release 4Q19 financial results in late August.

 

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