What happened
Shares of cosmetics maker Coty (COTY 2.32%) were looking attractive today after the company said it was intending to sell its professional beauty business, which includes brands such as Wella, Clairol, OPI, and ghd, as well as its Brazilian operations. Investors interpreted the move as the latest step in the company's turnaround and sent the stock up 14.1% as of 11:28 a.m. EDT.
So what
Such a move would help the company pay down debt taken on when it acquired dozens of brands, including Cover Girl, from Procter & Gamble in 2016, a deal that has largely weighed on the company's performance since and even led to a writedown of nearly $1 billion in value earlier this year. As of Coty's most recent earnings report, the company had $7.7 billion in debt.
Image source: Getty Images.
Management argued that the move would allow it to "unlock shareholder value, reduce complexity, and de-leverage the remaining business" and would make the company more directly focused on fragrance, skin care, and cosmetics, as opposed to hair and nail products. Skin-care products have been seeing a boom across the industry, especially at rivals like Estee Lauder, so it's understandable why Coty would want to streamline its business and target the growth areas in its industry.
Coty also said that the decision was in line with its previously announced turnaround strategy focused on "improving the company's execution capabilities, better leveraging its assets and delivering significant financial improvements."
Now what
Professional beauty is one of the company's three business segments, along with consumer beauty and luxury, and made up about 20% of the company's sales and adjusted operating income in fiscal 2019, so it represents a significant portion of Coty's business. However, organic revenue from professional fell 2% last year, a sign it's not delivering the growth the company needs.
Coty needs to focus on shoring up and turning around the consumer business, which has struggled since the P&G deal and continues to see sales slide. Selling the professional segment should free up resources and cash to do that. It's up to management to execute there, but it's clear that the market likes this move as a first step.
