Coty Inc. set out to transform its business in 2016 — and this year will bring the most dramatic change as it integrates the acquired Procter & Gamble Co. brands and sheds a portion of the combined portfolio.
During the company’s fourth quarter earnings call, Bart Becht, Coty’s Chairman and Interim Chief Executive Officer, said the merger will leave P&G with too many brands and Coty will ration certain ones out.
In fiscal 2017, Coty aims to have “a tighter, more focused portfolio,” said Bart, adding that Coty plans to divest 6 percent to 8 percent of the combined business.
“Our preparation for the P&G beauty brands transaction is well advanced. The future organization is now finalized, including office locations, structure and staffing of key positions,” said Bart.
Meanwhile in the fourth quarter of 2016, Coty reported a net loss attributable to the company of $31 million, or 9 cents a diluted share, compared with net income of $21 million, or 5 cents a share, in the year-ago period, as it invested to prepare for the integration of the P&G brands. The deal is on track to close this October, according to Coty. Adjusted net income for the three months ended June 30 gained 6 percent to $45.7 million.
Coty’s quarterly revenue gained 6 percent to $1.08 billion, and declined one percent on a like for like basis. In constant currency, Fragrance rose 3 percent, while Color Cosmetics fell 1 percent and Skin & Body Care fell 7 percent.
Asked if Coty will still have an appetite for deals in the wake of a spate of M&A activity and ramped up cash flow, Bart said, “Priority number one is to integrate the P&G business and create organic growth on the combined business.” He added, that once that is achieved Coty will look to complement organic growth with M&A to broaden its reach across category segments, channels and geographies.
The goal, he emphasized, is “to create not just a bigger business but a better business.”
Stifel analyst Mark Astrachan wrote in a research note on Tuesday, “We believe Coty remains in the very early innings of a considerable opportunity to build a global beauty business, with improving results in the legacy business coupled with the acquisition of select P&G beauty brand providing increasing optionality.”
The day following the close of the P&G deal this October, Coty’s Camillo Pane will assume the position of Chief Executive Officer. Bart will continue to serve as the Chairman of Coty’s Board. Camillo currently holds the position of Executive Vice President of Coty’s Category Development and is a member of the Coty Executive Committee.
According to a Citi Research note, Coty has once again stated that it hopes to post sequential improvement in its underlying revenue growth, with a return to positive top line growth on an organic basis in the second half of fiscal 2017. But the belief is that a return to top line growth has been long in the making.
“We consider this to be a disappointment, as it feels to us that Coty has been promising a return to top line growth for quite some time, and as evidenced by the 4Q16 results posted today, the company seems to struggle to get there, despite placing great emphasis on its Power Brands, on its reinvestment work (both marketing and new products) and on investing in its selling operations. While we are confident that Coty will deliver on its promise to improve profit margins and cash flow, we believe a return to top line growth is more important for the stock.”