After Shake-ups, Can Coty Management Team Turn the Business Around?

Coty Inc.’s new management team has a big project to tackle.
The company reported declines in sales and earnings for its fiscal second quarter on Friday, with net sales down 4.8 percent to $2.5 billion and a net loss of $960.6 million because of impairment charges related to the Consumer Division and CoverGirl and Clairol trademarks.
Friday was the first time chief executive officer Pierre Laubies, who was appointed in November, hosted an earnings call — for Coty and otherwise — and he made clear that the new management’s priority is to “return Coty to a path for growth.”
“We are also realistic that it will take some time,” Laubies told Wall Street analysts on the call. Laubies, with new chief financial officer Pierre-André Terisse, said they intend to establish a strategic plan for the business. The Consumer segment, which one analyst referred to as “the problem child,” is undoubtedly the biggest project Laubies, who heads that division in addition to running the overall business, and Terisse will need to tackle.
“In Consumer Beauty, we will need to earn our right to grow again,” Laubies said. “That means producing better products, better store execution, better pricing, less complexity, lower costs, more engaged people, a simpler organizational design, flatter structure, and so on.”  
Wall Street responded positively, with Stifel analyst Mark Astrachan writing a report titled, “Less Bad Than Feared, but Not Good.”
Initial response to Laubies and Terisse was clearly positive — the company’s stock soared after the call, up 26 percent to $8.93.
But the two are planning to tackle a mission — to build a beauty-industry challenger — that started when Coty paid $12 billion for 41 Procter & Gamble beauty brands in 2016. That vision has, so far, not come to fruition.
In conversations with Coty insiders and industry analysts, a picture emerges of a company in disarray. The issues go back to the very beginning, when Coty parent company JAB Holding Co. was putting the deal together, experts noted.
JAB’s strategy is to financially aggregate businesses and find the cost synergies, an approach it has applied to food and beverages. But beauty companies in general, and the P&G brands it bought in particular, weren’t particularly well-suited to such an approach. “Beauty is extremely emotive and has become increasingly so over the last five years,” said Stephanie Wissink, an analyst at Jefferies. “In general, JAB aggregates businesses where there is a way to extrapolate financial value, not necessarily brand value. It is not a brand building mechanism. It’s financial engineering.”
Moreover, many believe that Coty’s due diligence process for the P&G brands was flawed. For one, they mistook brand recognition for brand relevance, say observers.
“They were looking to do deals, and they found one that was a transformative deal — certainly, it turned out to be a transformative deal, not in the way they’d hoped — and maybe in their haste of wanting to get much bigger much faster they didn’t do as much due diligence on what it took to improve the trajectory of the brands they were buying from Procter,” said Astrachan.
“Procter had the brands for 14 months before the deal closed,” Astrachan continued. “They probably took their eye off the ball to some extent, and you saw that in the shelf space losses, the neglect of those brands.…The combination is got something that needed an awful lot of work, and I don’t think they knew what to do when they got it.”
Said another observer: “It’s like P&G went around the warehouse with a garbage bag and put a bunch of brands in there they didn’t want, put a bow on it, put it on the curb and Coty drove by and picked it up. Maybe P&G was savvier about assessing the underlying and inherent value of the brands than Coty was.”
For the most part, Coty’s Luxury and Professional divisions have fared OK — sales were up 7 percent and down 4 percent, in the most recent quarter, respectively. (Professional dips were in part due to supply-chain problems). In Luxury, Gucci is a bright spot, particularly the Gucci Bloom franchise, which was developed by the brand’s creative director Alessandro Michele. But problems abound in the company’s Consumer division, which houses many of the brands it bought from P&G — like Cover Girl, Clairol and Rimmel.
While Cover Girl is a well-known brand, its desirability among key consumer segments like Millennials has steadily decreased in the face of social media-driven competitors like Makeup Revolution, NYX, Morphe and others. “I was just in an Ulta store and they have a four-foot CoverGirl section,” said one analyst. “They don’t need 24 feet or even 10. They need four. If Ulta is a proxy for consumer orientation, we could be in a period of consistent shelf-space reduction for a brand like that.”
A beauty-tracking survey conducted by BMO Capital showed that while Cover Girl has gained some ground with the 24-and-under crowd, it has done so at the cost of alienating its core consumer — the 35-year-old (and up) mass-market shopper. 
Clairol, too, is a trouble spot. The competitive landscape is changing quickly, with disruptive direct-to-consumer custom color concepts like Madison Reed and Esalon taking market share from traditional players.
“The relaunches, the efforts for various executives, didn’t work because they underappreciated what it took to be relevant in makeup in 2017 and 2018, which was probably more digitally native-type brands with more of a social media presence than legacy brick and mortar brands like Cover Girl or Max Factor or Rimmel were,” Astrachan said.
Some analysts credit the missteps to the lack of beauty experience on the part of the management team assembled by Bart Becht, the former JAB partner who was a key architect of the P&G beauty acquisition. Coty does have industry veterans in some positions — Sylvie Moreau, who heads professional beauty, came up through Procter & Gamble, and Edgar Huber, head of Luxury, who spent more than a decade with L’Oréal. And it’s recently hired more — including Gianni Pieraccioni, who has worked for Revlon and Johnson & Johnson as chief operating officer of Consumer Beauty, and Daniel Ramos, a P&G and Revlon veteran, as head of R&D.
“The prior team was trying to do too much, too soon, and as a result ignored brand building and execution basics, while the marketing mix pendulum in Consumer Beauty swung too far toward digital, abandoning its core consumer, the 35-plus mass shopper,” wrote BMO analyst Shannon Coyne in a Jan. 16 research note. “To be clear, current management does not intend to abruptly depart from its current strategy, but merely pivot — adding TV back to the media mix, and modifying its message, recapturing mass appeal.”
Coyne is referencing Coty’s former Consumer Beauty team, which included Laurent Kleitman, the former president of the division, who left in January, and Ukonwa Ojo, who spearheaded the Cover Girl rebrand as global chief marketing officer for Cover Girl and Sally Hansen, who left shortly thereafter. Their departures followed the exit of Camillo Pane, who took over as ceo once Coty closed on the P&G brands, and Becht, who stepped down as Coty chairman in November before totally exiting JAB, where he was involved with a number of other businesses.
Becht declined to comment for this story, but Astrachan said a significant part of the blame for the company’s current states falls on his shoulders.
“I absolutely want to blame Bart Becht,” Astrachan said. “This was his baby, and he kept pushing this idea of ‘leader and challenger,’ and he wanted to get bigger fast and truly didn’t appreciate what had happened to the brands and what it took to get them right again. He left and it was in a bigger state of disrepair than anybody knew.”
One company insider said the continual upheaval in Coty's executive suite has resulted in poor morale across the board, with any attempt to create a common culture dead on arrival. While former ceo Pane was liked, some say that he was out of his depth in the role, particularly with no beauty experience prior to Coty.
The far-flung corporate structure — the c-suite is based in London, the consumer division and investor relations are in New York, while the prestige division is based in Paris and professional in Geneva — has also taken a toll on performance. “It’s not a cohesive, colocated corporate structure,” said Wissink. “From a shareholder perspective, the investor relations team is separated from financial strategy and leadership, which also creates the risk of inconsistent messaging.”
Exacerbating matters was the fact that management made assertions — including setting an earnings before interest, taxes, depreciation and amortization target of 19.6 percent, higher than that of the Estée Lauder Cos. Inc. and L’Oréal, that it could not reasonably meet — analysts said.
“Part of the issues from an investor standpoint have been the expectations have continuously over promised and been under delivered,” Astrachan said.
“They stood by their synergy and target assumptions even though the business was unwinding,” said Wissink, who noted that Coty on a standalone basis, before the merger, had earnings per share of about $1. Management said the merger would add $0.48 to that. But EPS for the combined entity this year is expected to be $0.50. “It not only was not accretive, it was degradative,” said Wissink. “This is not a typical JAB outcome.”
For the most recent quarter, Coty posted a $1.28 loss per share.
In a November research note, Astrachan noted that the P&G acquisition, “so far has been value dilutive to Coty shareholders, including JAB.”
The other problem, Astrachan said, is that after the P&G deal, Coty kept shopping.
“They did other moronic deals like Younique,” he said. “GHD was a good deal they saddled themselves with even more debt and had issues from a cash-flow standpoint that have left them with less ability to pay down debt than they expected, and stymied some of the turnaround because they’re left to try to massage the balance sheet to get to a position where there aren’t concerns about cash flows and dividends and ultimately debt.”
The end result, according to Astrachan, their ability to do more strategic initiatives.”  
Can new management turn the situation around? Most are taking a wait and see attitude — but Wall Street was clearly feeling favorable after Friday's earnings call. 
Coyne, who upgraded the company in January, has some faith that the new team can revive the original vision.
“Though it is early…we have greater confidence in the new ceo’s ability to urgently rectify supply-chain issues, improve out-of-stocks, and, importantly, get back to basics, which should lead to improved cash flow over the next several quarters and, over time, return underperforming brands back to growth.”
But one former executive believes it will be difficult because of the large investment that’s going to be required to get the brands back on track. “You need a growth mindset and you need to relax the profit commitment,” said this person, “and based on what they have to deliver to investors, they don’t have much space to do that.”
Source: Read Full Article