Four months into his new job as the chief executive officer of Coty Inc., Camillo Pane has developed a five-year plan centered around creating sustainable growth.
“Fiscal 2017 is just year one of this strategy,” Pane said. “It’s a transitional year, and clearly this implies certain types of performance,” he added. On the company’s earnings call for the quarter ended Dec. 31, 2016, on Thursday, he noted he was “not satisfied with the underlying performance of several parts of the business.”
Coty, which has grown in size through acquisitions, has struggled to post category gains recently. In Coty’s quarter ended Sept. 30, 2016, both color cosmetics and fragrances were down 10 percent, respectively, and skin and body care sales dipped 7 percent (before the P&G deal closed). For the second fiscal quarter net income decreased 47 percent to $46.8 million. Coty posted $2.29 billion in net revenues for the quarter, down 7 percent on a combined company basis. Diluted earnings per share were 30 cents, down 32 percent. Coty shares dipped about 7 percent in mid-day trading, to $18.50.
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One of Pane’s plans for the new, larger Coty is to revamp the culture, which he envisions going through a transformation, he said. “The new culture in my opinion is, and will be a recipe for success,” he said. “I’m talking about people feeling absolutely that their name is on the badge and that they really own the P&L…like it was their own business.”
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That culture also includes a healthy dose of ambition, he said, which is especially important in a market that is “being distracted” by “more niche brands [that] can bring innovation to the market in a few months.”
“We should do this as well,” Pane said. “I’ve introduced ‘act like a start-up’ in my cultural values…agility, the flexibility is absolutely vital to be able to win in the future in this market…we are reworking our innovation process,” he said, to shorten the time it takes to bring new products to market.
“When we built a new culture, we involved employees — this is not something that comes from the top without any involvement from the people who need to embrace the new culture,” Pane said. “The interesting piece is all the elements we ended up having…are exactly where the people told us they wanted to go.”
Pane outlined a four-pillar strategy that he believes should lead to growth: strengthen global brands; shift resources to fuel growth in growing the brands with higher potential; stabilize remaining brands, and continue to expand the geographic reach of the brand portfolio. Pane’s goals were unveiled at the same time as Coty’s second-quarter earnings, which are bumped up by sales from the acquisition of 41 beauty brands from Procter & Gamble, but otherwise down in all divisions except for Professional Beauty. The company noted more inventory than expected at the brands taken over from P&G.
The Luxury Division, which houses prestige fragrances and skin care, posted $835 million in sales, a 7 percent dip in combined company year-over-year figures, but up 52 percent otherwise.
Consumer Beauty, which is made up of retail hair coloring and nail, as well as Cover Girl and other makeup brands, posted $1 billion in net sales, down 13 percent on a combined-company, year-over-year basis, but up 68 percent in actual sales. when counting the new brands. Pane said that part of the company’s plan is to relaunch Cover Girl and Max Factor.
“Cover Girl has still the best equity in the U.S.…in mass color cosmetics, but if you think about the brand, the targeting has been quite unclear,” Pane said. “We could do a stronger job in visual identity, launching innovation.” For Max Factor, which will be relaunched in existing markets, the plan involves a return to its makeup artistry roots — “We need to make sure we own this positioning,” Pane said.
The professional division, which contains Wella, OPI and other brands, was up 11 percent in combined company year-over-year figures with $460 million in revenues, and up more than 100 percent in actual sales. For OPI, Pane said the business will focus heavily on the business-to-business experience. “Finally, we have put OPI under the responsibility of a team that understands the professional channel,” Pane said. “Manicurists and pedicurists are our key priority as we go to market.”
Coty shifted its reporting to those three divisions — Luxury, Consumer and Professional after the close of the P&G deal, which added 41 new brands to the Coty beauty offering. The company said it paid $11.6 billion — up from a previously disclosed $11.4 billion, and down from the original $12.5 billion for the acquisition. That figure includes $1.9 billion in assumed debt. The business expects $750 million in synergies from the transaction by 2020.
Pane confirmed that the business plans to seek alternatives for 6-8 percent of the portfolio from a revenue percentage, including divestitures, but declined to elaborate on the timeline for those moves. “We have now made progress to identify non-core portfolio brands,” Pane said. We are assessing the alternatives.”
“While near-term integration distractions and resulting weak trends are disconcerting, we still see compelling mid to long-term growth acceleration, margin enhancement and ongoing beauty M&A platform emerging at a reasonable valuation relative to long-term potential,” wrote Deutsche Bank analyst Bill Schmitz in a research note.