Indebted cosmetics maker Coty is working on a plan to sell or close most of its factories and outsource more operations in a new “asset-light” strategy aimed at weathering the Covid-19 storm, its chairman said.
“We’re going to get lean and nimble,” said Peter Harf, managing partner of Coty’s majority owner JAB Holdings, who has also served as chief executive since June.
“Cosmetics is a complex profession so if we play it like Estée Lauder or L’Oréal, we are dead,” he added in an interview, referring to Coty’s biggest competitors.
The move comes as lockdowns and store closures pushed revenue for the company behind the CoverGirl and Max Factor brands down 63% to $560.4 million in the last quarter of the year through April. June 30th. That left Coty, one of JAB’s oldest investments, which manages the wealth of Germany’s billionaire Reimann family, suffering a net loss of $696 million for the quarter and $1.1 billion for the year. complete.
All metrics for the latest quarter were significantly worse than analysts had expected, according to the consensus compiled by the company.
The task of delivering the long-promised turnaround will now fall to new chief executive Sue Y Nabi, who is due to arrive on September 1. The beauty industry veteran, who spent 20 years at L’Oreal and later founded a vegan skincare brand, will be Coty’s fifth chief executive in the tumultuous period since buying the Procter & Gamble beauty product portfolio for $12.5 billion in 2015.
The deal was aimed at doubling Coty’s size and propelling the group to the forefront of beauty, but instead left it saddled with high debt, while a botched integration process weakened its brands at the same time. where new challengers on Instagram were rising.
Although Coty is one of the smaller investments in JAB’s portfolio – the vehicle has far larger ones in coffee company Keurig Dr Pepper and JDE Peet – it has proven to be one of the most troublesome.
According to its latest annual report, Coty manufactures nearly 80% of its products in facilities located in countries including the United States, Brazil and China.
The pandemic dealt a further blow to Coty by temporarily closing hair and nail salons where its professional products are sold, as well as department stores for its fragrances. But its consumer brands such as CoverGirl continued to be sold in pharmacies and supermarkets that remained open.
Coty’s biggest rivals faced similar difficulties amid global shutdowns, but their sales in the quarter to the end of June fell much less sharply: down 19% for L’Oreal and 32% for Estee Lauder.
Nonetheless, Mr Harf expressed confidence due to what he called “significant improvement in the business” over the past two months. “We expect the positive momentum to continue, with a return to earnings in the first quarter,” he said, referring to adjusted operating income.
Mr Harf said the deal signed in May for private equity fund KKR to buy 60% of Coty’s professional beauty division and inject $750 million into Coty itself would strengthen the balance sheet. The deal would bring in around $3 billion in revenue and Coty said it was “on track” to close by the end of the year.
Net debt was $7.8 billion at the end of fiscal 2020, compared to $7.4 billion at the end of the group’s fiscal 2019 and $7.3 billion in 2018. Coty’s increase in debt came after it burned through more cash than it generated from the business. , resulting in negative free cash flow of $318 million.
To cope, Coty has cut costs since the pandemic, including laying off staff, and promised in June to cut fixed costs by $600 million over the next three years. It also temporarily suspended dividend payments.
“My job is to cut costs to the essentials to create fuel for our new CEO to invest in our brands,” Harf said. “Sales have to grow to save the business, because you can only cut costs to a certain extent.”
Coty shares are down 66% this year, compared to a 7% rise for L’Oreal and a 4.5% rise for Estée Lauder.