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Coty Chalks Out Restructuring Plans, Asset Impairment a Worry

Zacks Equity Research

To boost performance across segments and enhance margins, Coty, Inc. COTY has revealed a strategic Turnaround Plan. It includes numerous organization-wide measures to strengthen business capabilities. Management also set certain financial targets for fiscal 2023.

Though ambitious, the news failed to boost investors’ optimism. The stock fell 13.5% in yesterday’s trading session. The downturn was caused by management’s frail view for fiscal 2020 and fiscal 2019, thanks to apprehended impacts of the restructuring plans. That said, let’s take a closer look at these developments.

Restructuring Efforts to Boost Long-Term Growth

The Turnaround Plan emphasizes three important areas — reviving growth, boosting operational leadership as well as developing a culture of pride and performance. These factors are likely to strengthen margins and augment free cash flow.

In sync with these strategies, Coty plans to focus on brand building, enhance shelf productivity through assortment optimization, improve product mix and develop a strong pipeline of innovations to support expansion.

Additionally, management is looking toward minimizing costs to boost profitability. Such efforts include the optimization of supply chain, reduction of cost of goods sold, rationalization of SKU’s as well as reducing inventory. Moreover, cutting down on fixed costs is an important goal for management. Further, the company is striving to simplify decision-making process by refining organizational layers and improve the process of responsibility allocation among units.

To implement the proposed actions, the company plans to make changes in organizational structure. Accordingly, it plans to develop regional commercial teams in Europe, Middle East & Africa (EMEA) and in Americas & Asia Pacific. The regional teams and marketing units will be established for the Luxury and Consumer Beauty segments. However, the Professional Beauty will continue as a distinct unit owing to its unique salon-focused operations. These organizational changes entail modifications in the executive committee.

Further, Coty has revealed plans to develop a centralized headquarter in Amsterdam, wherein most of the corporate functions will be carried out. This location is likely to provide greater cost efficiency, tax stability and improve resource accessibility.

Based on the aforementioned plans and other prudent moves to bolster financial standing, the company has set certain targets for fiscal 2023. The company expects operating margin in the range of 14-16%. Further, free cash flow is estimated at $1 billion and net debt to EBITDA ratio is expected to be below 4x.

To implement the turnaround plans, the company expects to incur costs worth almost $600 million, from fiscal 2020 to fiscal 2023. Apart from this, the company has costs worth nearly $160 million associated with previous development programs.

The Downsides

Although the aforementioned moves are in sync with management’s determination to strengthen the overall business, the company’s bleak outlook for fiscal 2020 were enough to dampen spirits. It expects revenues for the said period to decline moderately. Moreover, in connection with the growth initiatives, the company expects to incur impairment of intangible assets worth almost $3 billion. This is likely to be reflected in fiscal 2019 results. Further, adjusted operating income (at constant currency) is likely to be up 5-10%, while cash flow is expected to improve moderately in fiscal 2020.

Wrapping Up

There is no denying that Coty’s restructuring initiatives will bolster business capabilities in the long term. Meanwhile, cost impacts and other adversities associated with such moves will have to be borne by the company in the near term.

Nevertheless, we expect this Zacks Rank #3 (Hold) stock to tide over the shortcomings on the back of strong brand performances, across different channels. Also, the company’s ongoing efforts to streamline operations and boost savings are encouraging.

We note that Coty has gained 3.6% in the past three months while the industry rose 11.7%.

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