What happened
Shares of Coty (COTY 2.95%) took a dive today when investors seemed underwhelmed by the company's turnaround plan, released this morning. The update had been highly anticipated; Coty had struggled since acquiring Cover Girl, Clairol, and dozens of other brands from Procter & Gamble for more than $12 billion in 2016.
Coty stock is down 55% over the last three years, despite a recovery this year as the company brought in a new executive team, including a new CEO and CFO, and as JAB Holding -- the giant, consumer-focused, private investment group that owns companies including Panera Bread, Krispy Kreme, and a majority of Keurig Dr Pepper -- upped its stake in Coty to 60% earlier this year.
Coty shares closed down 13.5% today.
Image source: Getty Images.
So what
Coty outlined a four-year transformation plan, which includes a $3 billion asset impairment related to the brands acquired from P&G, and said it would incur one-time costs of $600 million to implement the plan.
By fiscal 2023, about four years from now, Coty said that revenue would be similar to where it is this year (fiscal 2019), but that its operating margin would improve to 14%-16%; this compares to an adjusted operating margin of 10.6% through the first three quarters of fiscal 2019. It also expects free cash flow around $1 billion, a significant improvement from $120 million through the first three quarters of this year, and a net debt-to-EBITDA ratio under 4, compared to 5.7 today.
In order to accomplish this, the company is restructuring management of its luxury and consumer beauty segments under regional teams. It's also moving its headquarters from New York to Amsterdam, which it called a cost-efficient and tax-stable location close to its main markets and a strong base of talent. Management said the new organizational structure would be in place by the new year, and the headquarters move will be completed a year from now.
Additionally, the company said it would trim the number of SKUs (stock-keeping units) it sells in order to drive efficiencies. It also said it would lower input costs, improve its supply chain, and, with the help of its reorganization plan, reduce fixed costs.
Now what
It's hard to criticize Coty for the range of its turnaround plan, which is ambitious and far-reaching. However, investors seem skeptical that the company can reach its targets, and are also wary of the $3 billion writedown and $600 million in one-time costs. That the company also expects revenue to be flat four years from now shows how entrenched the challenges in its consumer beauty business have become.
Nonetheless, if the new management team can execute on its turnaround goals, the stock should rise over the coming years. At the very least, investors now have a benchmark by which to measure the company's progress.
