Coty Inc. shares fell 14.7% in Monday trading, en route to the second biggest decline in the stock’s history, after the beauty company announced a $600 million turnaround plan that fell short of expectations.
“Coty rightly revealed many changes today with a long-term mind-set,” wrote CFRA’s Arun Sundaram in a note. “However, with a new organization and fiscal 2020 likely making or breaking this plan, we think Coty is exposed to more risks than potential rewards.”
CFRA reiterated its sell opinion and $10 price target.
The one-time $600 million cash cost of Coty’s COTY, +0.21% plan will be spread across fiscal years 2020 through 2023. That figure is in addition to about $160 million in previous program costs.
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The beauty and fragrance company expects to record a $3 billion impairment of its intangible assets, with the final amount to be recorded with its fiscal year 2019 earnings.
The turnaround plan will include brand-building efforts including improved assortment and innovation while reducing the “complexity” of the product range, and a new organizational structure that will reduce fixed costs.
Coty will create regional commercial teams in the Americas, Asia Pacific, and Europe, Middle East and Africa (EMEA) with marketing units for luxury and consumer beauty. Professional Beauty will remain its own unit with a focus on salons.
Fiona Hughes will be named president of consumer beauty brands, Simona Cattaneo will be president of luxury brands, Edgar Huber will be president of the Americas and Asia Pacific, and Gianni Pieraccioni will be named president of EMEA, all effective Jan. 1, 2020.
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Full-structure implementation and consolidation of management headquarters will be completed by July 1, 2020. For fiscal 2020, Coty expects a “moderating” decline in net revenue.
“Some may have been hoping for larger portfolio changes, or a major M&A announcement,” wrote Wells Fargo in a note. “At this point, Coty remains a long-term turnaround story, in our view, and we note that turnarounds generally never happen in a straight line. We expect fundamentals to remain choppy given the ongoing challenges in consumer beauty and maintain our market perform rating.”
Coty says the mass beauty category has been declining 1% to 2%, which Chief Executive Pierre Laubies said was “not alarming” on the call following the announcement. The company plans to prioritize 20 brands including CoverGirl, Rimmel, Burberry and OPI.
“The pressure on our consumer beauty business has really been out of share losses, which are a big component of what we are trying to address with our turnaround plan,” he said, according to a FactSet transcript. “And if we are able to stabilize our share in this moderately declining category, this will allow Coty to return back to growth.”
Coty stock has gained 78.4% for the year to date, while the S&P 500 index SPX, +0.63% is up 18.6% for the period.
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