Coty drops as P&G deal weighs on sales growth

Bad decision? Bad timing? Either way, investors are not reacting kindly to Coty’s latest earnings results, which show the US cosmetics group struggling to stem the tide of declining sales in both its own portfolio and its newly acquired stable of Procter & Gamble’s beauty brands.

Shares in Coty fell more than 5 per cent in pre-market trading after the owner of Covergirl reported a 7 per cent drop in revenues for its fiscal second quarter.

The result is the first to include the sales of Clairol and 42 other beauty brands that Coty acquired from P&G for $12.5bn and the weak performance is expected to raise questions over the timing and wisdom of the deal given the fierce competition in the mass beauty and personal care industry.

“Consistent with our comments on the last earnings call, Q2 was a challenging quarter,” said chief executive Camillo Pane.

“The business was impacted by significantly higher-than-anticipated inventory levels in the market on the acquired P&G Beauty Business, competitive pressure in the Consumer Beauty division and the distraction associated with the merger integration efforts.”

Revenue for the combined businesses fell to $2.29bn for the three months to end of December, below expectations of $2.36bn as the strong dollar exacerbated the sharp sales drop in its luxury and consumer beauty divisions.

Coty had a particularly rough quarter in the US, where weak demand for consumer beauty products dragged revenues in North America 12 per cent lower.

“There are some changing dynamics in cosmetics where consumers look at brands and products and trends, and want innovation more frequently, so we need to adjust the positioning of some of our brands, [we'll be] changing the innovation process in colour cosmetics to be faster to market,” Mr Pane said, adding that pushing the company’s ecommerce strategy of of key importance as well.

Overall net income tumbled to $46.8m from $89m “reflecting lower operating income and higher interest expense, partially offset by lower tax expense.” Stripping this out, adjusted net income rose 45 per cent to $223.3m – albeit still low for forecasts of $245.3m.

Last quarter Bart Becht, Coty chairman, blamed the “massive distraction” of integrating the P&G assets for a fall in Coty’s first quarter sales.

On Thursday the company said it remained on track to complete its P&G beauty business integration, with a $750m synergy target by 2020 and said it expects the revenue decline to slow down for the second half of fiscal 2017.

“It’s a transitional year and we were somewhat expecting these results,” Mr Pane said. “We need to remind ourselves that this is not an integration but a new organisation, and we believe the new company will be much stronger than the previous organisation, one with larger scale . . . with better people, and can attract stronger people.”