Coty Inc. on Monday announced a turnaround plan that includes a new brand building effort plus financial and operational changes to revive growth and recapture a higher profile in the beauty market. The company is also moving its headquarters to Amsterdam as it downsizes its corporate operations, according to a company press release.
To that end, the company said it "has agreed with its banks an amendment to its Credit Agreement" and "has ample liquidity and available credit lines for a total of more than $2 billion."
The company has been hampered by its 2016 merger with Procter & Gamble's fine fragrance, cosmetics, salon professional and some other styling businesses because the integration was more complex and the P&G businesses were struggling more than Coty had anticipated, executives said on a conference call Monday morning. Coty expects to record about a $3 billion impairment of its intangible assets, they said.
Coty's merger with a slice of P&G's beauty business three years ago made it the third-largest beauty company in the world, with some $9 billion in revenue, according to a press release at the time of the merger.
But the company has failed to meaningfully take part in the global rise in beauty sales. In its most recently reported quarter, the company said that net revenues fell 10.4% year-over-year, as net loss narrowed to $12.1 million from the $77 million loss in the prior-year quarter. Adjusted gross margin in the third quarter declined by 140 basis points to 62.9%, with expanded luxury and professional margins hampered by margin contraction in consumer sales, according to a May press release.
Executives on Monday said its place in the beauty market is poised to change, with a four-year plan centered on streamlining its operations, both in its corporate teams and its portfolio. Much of the brand-rebuilding work has already begun, starting in the U.S. and U.K. markets, and in those areas retailers have responded well to Coty's explanation of its plans, executives said.
On the product side, the plan is to reduce expenses by "rationalizing SKU's and sub-ranges to reduce product range complexity, lower inventory and drive better shelf productivity" and by "optimizing Coty's supply chain utilizing its existing manufacturing footprint." On the human resources side, Coty will operate global regional teams in Europe, the Middle East & Africa, the Americas & Asia Pacific, and will form brand marketing teams into luxury and consumer segments.
Assuming net revenues similar to its fiscal year 2019, Coty's 2023 targets are for operating margin of between 14% and 16%, free cash flow of about $1 billion and leverage of net debt to EBITDA of less than 4x. The company also expects one-time cash outlays of about $600 million spread over 2020 through 2023, in addition to about $160 million "connected to previous programs." The company anticipates a moderating decline in net revenues, constant currency-adjusted operating income to rise 5% to 10% and "moderate" free cash flow improvement.
Coty's professional beauty business, catering to salon owners and professionals in hair and nail care, with brands that include Clairol Professional, Nioxin, OPI, Sebastian, System Professional and Wella, could also get a boost from Amazon's recent entry into that market, which features a new, curated site for salon pros, including many Coty brands.