Fixing Coty: CEO Talks Turnaround, Brand Building, Shelf Space Plans

The new chief executive officer of Coty Inc., Pierre Laubies, admits that the company has made mistakes.
"In every breakdown, there is a breakthrough," he told WWD Monday morning as the company unveiled turnaround plans that are expected to be in place by Jan. 1.
He was talking about shelf space, a continual problem for the owner of CoverGirl and Rimmel, especially with some of the brands it acquired from Procter & Gamble in 2016. Laubies, who joined Coty in November, stands by that deal, though, noting that in the long run, it has made Coty a stronger beauty player.
"Our point of departure is not exceptional, but there are a lot of things we can capitalize on," he said in a phone interview. "Fundamentally, Coty is a strong platform. It's definitely a stronger platform than it was when it was alone without the P&G beauty business."
He went on — in the interview, and also on a call with Wall Street analysts — to outline Coty's top brands. It owns three of the top 10 fragrance brands, four of the top mass cosmetics brands, and three of the top hair colors brands, he said. And while the integration of many of those brands took more time than initially anticipated, it's now done, and the company's turnaround is coming from a base of IT integration, "which is always a big hurdle in this sort of event," he said.
"Now, we have a strong base to work from," he said. "Our objective is simple: We want to build a better business before we can build a bigger one."
Even with a turnaround plan in place, Coty's stock price tanked Monday after the company said that as part of the plan, it expects to record a $3 billion impairment charge of its intangible assets. Shares were down more than 12 percent in midday trading, to $11.69. That price is still up following Coty parent company JAB buying an increased stake in the business in May.
Broadly, to turn around, Coty is planning to improve margins, lower the debt-to-earnings-before-interest-taxes-depreciation-and-amortization ratio and institute an organizational restructuring complete with regional heads. Coty is also establishing a global headquarters in Amsterdam, though the Luxury Division will remain headquartered in Paris and the Professional Division will remain based in Geneva, Laubies said.
Coty’s target for fiscal 2023 is an operating margin of between 14 percent and 16 percent, free cash flow of around $1 billion, and a net debt to EBITDA leverage ratio of less than four times.
Pillar one of the plan is to "rediscover growth," the ceo said, which entails revamping in-store execution, product assortments and media choices. In the longer term, Coty will also build out its innovation pipeline, he said. "We will aim at increasing what I call our category expansion. Today, we play in lots of the categories in beauty, but we do not play in all of them, and that reduces our strategic growth ceiling," Laubies said.
Pillar two is operational leadership.
"Clearly, operational execution has been a bit of a challenge lately at Coty, and we've learned our lesson," Laubies said. The company plans to adjust marketing choices to improve margins.
The company plans to rationalize stockkeeping units and sub ranges to reduce complexity, lower inventory and increase productivity of the shelf, and simplify decision making.
"We have a lot of issues or a lot of opportunities in our value engineering. We have a lot of supply chain productivity programs to get in, we have a lot of opportunities in our logistics costs and our costs of goods sold, and we have a massive opportunity in brand simplification," Laubies said.
To do that, Coty is also revamping internally. Regional heads and new division heads, except for the professional unit where Sylvie Moreau remains in charge, have been named. A spokeswoman for Coty said that the company could not provide detail on any potential job cuts at this time.
Edgar Huber, previously president of the Luxury division, will be appointed president of Americas & Asia Pacific. Gianni Pieraccioni will become president of Europe, the Middle East and Africa. Fiona Hughes will be appointed president of the Consumer Beauty segment, and Simona Cattaneo will take the helm of the Luxury division as president.
Going forward, Coty's efforts and investment will center around about 20 "mission critical" brands that make up about 60 percent of total sales, Laubies said. In its presentation to Wall Street, executives identified Rimmel, Burberry, CoverGirl, Wella, Hugo Boss, Max Factor, Gucci and OPI as priority brands. If Coty can stabilize the Consumer segment, which has been struggling, it should be able to stabilize the whole company by 2023, executives said on the analyst call.
"There is a direct correlation between the level of profitability generated and the strength of your brands," Laubies said in the interview. "As a consequence, internally, we are going to be a brand-building machine. It is our bread and butter. Products sit on the shelf, brands sit in the mind — definitely we have great assets at Coty and our job is really to continue to build them, strengthen them and take care of them, and that will be the root of financial success."
Non-priority brands will be managed "professionally," Laubies said, and will still be supported using Coty's "proprietary technologies" to ensure assortment and distribution are on point.
"Eventually, as we grow and as we improve the profitability of the business, definitely our ability to invest might improve, and our threshold to investment might lower, and as a consequence we might be able to return to advertising levels for those brands, but that's not the priority at this stage," he said.
Laubies, who conducted the interview with chief financial officer Pierre-André Terisse, also noted the importance of improving Coty brands' productivity on retail shelves.
"It is a systemic opportunity that we have to solve," Laubies said. "We have identified that this is an area where we have not done a great job, and not only us, but over the last 10 years. These things… over time."
Initially, Coty will focus on productivity of existing shelf space, with an eye to potentially expanding shelf space in the future, he noted. "Today we want what we have to work harder, and to go back to delivering healthy margins to our customers as well as better quality business for ourselves."
Financially, the goal is to get the debt to EBITDA ratio below four times, said Terisse. Turning the company around is the number-one priority, but the business is open to looking at acquisitions provided it will still be able to meet that debt goal by fiscal 2023, he said. Asked about deals, he said Coty "will have a look at the portfolio and take advantage of opportunities to make it better and improve it" and that it would do so "by adding more Asia, more skin care, more premium."
He declined to comment on the WWD report that Coty is in talks to buy a majority position in Kylie Cosmetics.
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