In order to unlock prospective areas and ramp up turnaround efforts, Coty Inc. COTY is seeking options for Professional Beauty unit and related hair brands. The company also plans to explore alternatives for its Brazilian operations. The review process also includes intentions of a divestiture. Following the news, shares of this New York-based company soared 13.4% on Oct 21.
Notably, the move is part of management’s turnaround plans to focus on areas with greater growth potential that includes fragrance, cosmetics and skin care. Let’s delve deeper.
Strategic Review Likely to Aid Business Refinement
The company expects the review process to be completed by summer 2020. If a divesture is considered, brands like Wella, Clairol, OPI and ghd (part of the Professional Beauty unit) will be excluded from Coty’s portfolio. Markedly, the Professional Beauty division and Brazil operations each have a separate stand-alone business structure.
The company’s intentions to explore alternatives for the Professional Beauty unit are prudent, as the division has been sluggish for a while. During the fourth and the third quarter of fiscal 2019, revenues from this business slipped 7% and 6.1%, respectively. The downside was caused by headwinds in Coty’s North American operations due to de-stocking of key accounts.
Coty expects that the review process, which is part of the company’s transformation plans, will make the organization more streamlined. Also, it will enable the company to enhance innovation capabilities in growth-oriented spaces such as the Luxury division. Further, the company intends to bolster its fragrance, cosmetics and skin care brands.
Management expects to utilize proceeds from the potential divestiture to reduce debt load and enhance shareholder returns. Once completed, the sale of the aforementioned businesses is expected to lower the company’s financial leverage.
Coty is undertaking appropriate initiatives to make its business more flexible. Apart from the strategic review of the Professional Beauty unit, the company is also striving to revive the Consumer Beauty business. In this context, the company has implemented concrete plans to stabilize market share in key markets and reduce costs. Additionally, this Zacks Rank #3 (Hold) company is striving to upgrade operating systems as well as optimize manufacturing and logistics.
We expect such moves to help the company maintain strong footing in the beauty arena and stay in investors’ good books. Incidentally, Coty’s shares have gained 6% in the past three months against the industry’s decline of 1.1%.
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The Estee Lauder Companies EL, with long-term earnings growth rate of 12.7%, carries a Zacks Rank #2.
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