Coty sees revenue improving as turnaround plan takes shape; to exit Younique stake

Cosmetics maker Coty Inc raised its annual revenue forecast on Wednesday, as it embarks on a multi-year turnaround plan that involves cost cuts and increased investment in advertising, sending shares up 5%. It also announced plans to sell its controlling stake in peer-to-peer beauty brand Younique.

The company said in July it would write down about $3 billion in value of brands acquired from Procter & Gamble Co in 2016, and laid out a restructuring plan to turn around the business hurt by falling sales in its consumer beauty unit.

The plan involves reducing organizational layers and reorganizing the operation into regional units with new business heads. Coty expects to incur restructuring costs of about $300 million during the year.

The consumer beauty unit has suffered in the past, mainly from the poor performance of brands it bought from P&G, including Covergirl and Max Factor, due to integration issues.

Consumers shifting to trendier, Instagram-friendly brands like NYX and Winky Lux has also been hurting the unit.

Coty said it was now pumping money into advertising, while cutting down on promotion and discounts, to boost sales of brands sold under the segment.

“We have been historically overpromoting... We have made the decision to be less dependent on promotion and more dependent upon advertising,” Chief Executive Officer Pierre Laubies told analysts.

Laubies said revenue projections for the year reflect “clearly improving trends” in the segment, and stressed that the unit may not show a growth, but a reduction in decline.

The company expects net revenue, on a comparable basis, to be flat to slightly lower in fiscal 2020, with visible progress in the first quarter. It had earlier estimated a moderating decline in net revenue.

In the fourth quarter, revenue from the consumer beauty segment fell 15.2% to $902.4 million, as it also took a hit from its online Younique brand.

Coty on Wednesday said it ended its partnership with the brand, in which it bought a 60% stake in 2017.

"Given the different nature of the companies’ business models and the need for a strong and specific focus to successfully improve fundamentals, Coty and Younique have agreed to part and focus on their respective strengths," the group said in a press release.

Coty also forecast earnings to grow by mid-single digits in the current year. Wall Street estimated earnings of 68 cents, or a growth of 5.8%, according to IBES data from Refinitiv.

“Management seems to have a handle on the business and is starting building credibility with investors,” RBC Capital Markets’ Nik Modi said.

Net loss widened to $2.80 billion, in the reported quarter, from $181.3 million, a year earlier, mainly due to the writedown.

Excluding items, Coty earned 16 cents, meeting analysts’ estimate. Net revenue slipped 8% to $2.12 billion, slightly above expectations.