COTY from $11B -> $40B

TLDR:

My disaster of a 1st Startup

Stripping Coty to dominate the Prestige market.

Let’s Make You 5% More Margin

LBAB Community

My first startup was an absolute disaster. My senior year of college, I joined the entrepreneurship program at the University of Maryland and met who would become my 2 Co-Founders at a pitch competition. 

The idea: an algorithm-based job board that matched graduating college students to entry level positions based on their responses to games/assessments in Critical Thinking, Emotional Intelligence, and Risk Tolerance.

As a graduating senior who wasn’t excited about his job prospects, it seemed like a great problem to solve. So, I met the team, convinced them I could help with Marketing & Sales, and joined as the 3rd co-founder the December before I graduated.

I went all in on the biz. 

1. Started working on it during all waking hours. Including in class. 

2. Raised money from Friends & Family to pay our devs.

3. Convinced my best friend to join. 

4. Leveraged everyone and anyone in my network to get intros. (Secured an intro to AOL.)

5. Borrowed $10k from my parents.

The TLDR of what happened:

1. We won a couple of college pitch competitions. 

2. Pivoted 50x. Then we realized we needed to prioritize the B2B side of the offering over our original marketplace concept.

3. Never got a product to market despite signing up 15 Pilot customers, including a few big logos.

4. Had a nasty falling out with my Co-Founders after a brutal comp negotiation and what my actual role in the biz would be.

5. Ended up moving back with my parents.

The entire experience was exhilarating, harrowing, and one of the largest growth periods of my life. There are plenty of mulligans I’d take, but I wouldn’t have taken a different course.

Invaluable Lessons:

1. Always negotiate comp before you start working. 

2. Don’t ignore the red flags. Bring Feedback quickly.

3. How to sell to large bizs.

4. The value of speed to market >>> anything else.

5. The importance of picking the people you spend all day with.

The 1.5 years I spent working on that project forever changed my career. Instead of working at a DC Ad agency and hawking Car Insurance commercials. I got into Software. I pushed myself out of my comfort zone. Truly learned how to sell in the real world. Taught myself more about digital marketing in 6 mos than I had learned in the previous 4 years from my Marketing college degree.

It was the insane, “not-great-for-my-career” option my parents didn’t dream of for me, but without the experience I wouldn’t be the entrepreneur I am today.

Let’s Examine This Biz

COTY, your favorite brands’ Beauty House, is suffocating in the public market under a mountain of debt despite looking pretty similar to your favorite brands Beauty biz. 

Trading at $12.16/share with a $10.8B market cap, -30% since Jun ‘13 this is the mathematical representation of meh. Despite having a good year and growing well, the biz has $4B in outstanding debt! Keeping it’s P/E ratio to a fraction of relevant comps.

COTY creates Beauty and Fragrance products for Adidas, Hugo Boss, Burberry, Vera Wang, Calvin Klein, Gucci, David Beckham, The Kardashians, Katy Perry, and more.

We’re going to buy this biz:

• Sell off half the portfolio to pay down the crippling debt

• Create the next LVMH Beauty & Fragrance with the remaining Prestige brands

Financial Summary

TLDR Analysis: This Biz is FIT!

Didn’t have a banner year in any department, but small changes led to massive outcomes. The combo of Rev & GP @ +5% YoY + OPEX -4% @ YoY = Net Income +792% YoY. 

• By pushing for incremental growth while tightening the belt, COTY opened up the profit goldmine.

• LY Coty’s Net Income was 1% of Rev. This year it’s 9%.

• I don’t love that Free Cash Flow (FCF) @ $402.9m (-27% YoY) when outstanding debt = $4.2B. 

That’s why a biz with exponentially growing Profits is also in the Financial doghouse, trading with a 21.9x P/E ratio vs. comps like Estée Lauder and ELF at 80x+. It’s doing well, but to pay down that much debt, they need to operate with a sharpshooter’s precision.

1 bad year, and the spiral to bankruptcy court is real.

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Let’s Fix This Biz!

Here are the 3 ways we’re going to unburden Coty from this avalanche of debt and turn our $11B acquisition into a $40B exit.

1) Sell the Consumer Brands to escape the Debt Vice grip.

This is a prestige Beauty & Fragrance biz that got too high on the hog the past 5 years trying to scoop up as many brands as possible. The DTC hype was enticing but has left COTY with a mountain of debt and bag of brands that aren’t:

❌That big (Consumer = 48% of Rev)

❌Growing Quickly (Topline = +5% YoY)

❌That Profitable (3% Margins vs. Prestige @ 14%)

❌Providing a Halo for the overall brand 

The Prestige line is bigger + more profitable @ 62% of the biz’s Rev & 89% of Profits.

The entire Consumer unit is essentially a loss leader that I doubt is providing a real upgrade path to the profitable Prestige lines. If Consumer were the larger Topline unit and growing quickly, the strategy would be justified. But you’re going to have a tough time convincing me that consumers are upgrading from Adidas Fragrance -> Hugo Boss in droves.

The only painful separation will be CoverGirl, which might be worth keeping as the 1 mass market offering with a notable brand name.

The Consumer portfolio currently has $63.3m in Profits and a 21x P/E ratio we should be able to get $1.3B if we straight up sell the assets with no real strategic thought behind it. I believe our team could juice those numbers up to $2B in value over the next 3 years. There’s half of the outstanding debt right there.

Why this matters.

This is the greatest unlock to increasing the P/E ratio which is what really matters. Investors are hammering the P/E ratio (aka what they believe the biz is worth) because there’s candidly just too much debt on this biz.

If we can rightsize the amount of debt to Profits we’ll unlock massive increase in value.

My calculation is essentially trade $63m in Profits (11% of total) for halving the debt which should unlock 20-40x more in P/E Ratio. Turning the remaining $483m in Profits into a $19.8B - $29.5B worth of value.

Takeaway: Don’t Chase Chickens when you’re sitting on the Golden Goose.

2) Push More Prestige + Female

The beauty of luxury is that you can always make it more luxurious. From all financial + economic data, 1 trend is evidently clear. The rich keep getting richer. A goldmine for luxury brands.

The surprising insight is that Coty is more focused on Men’s brands than you’d expect. While they have massive Female brands like Kylie Cosmetics, Chloe, and Tiffany & Co., Coty is more of a male-dominated biz with Calvin Klein, Davidoff, and Hugo Boss.

This has the opportunity to hit my 2 favorite consumer biz building principles.
1) Move Upmarket
2) Focus more on women. 

Both are the fastest way to profitable growth. 

Through New Product introduction and acquisitions, take the new, leaner Prestige brand and focus on acquiring more brands under the female Prestige category. Build the portfolio back up with Female-focused Prestige brands. The more luxurious, the better. 

The name of the game is optimizing Profit/Customer:

• Increase price points with high margin items.

• Focus on customers that buy significantly more. And habitually

There’s nothing better.

Throughout my career, the 1 common theme I’ve found success in is focusing on the female customer. With natural products like Beauty & Fragrance, Coty has the opportunity to  exponentially increase their half a billion in Net Income.

Takeaway: Always optimize for Profit/Customer Audiences.

3) Launch Coty.com. The Prestige Beauty Marketplace. 

Seed with its own products -> become the Retailer selling everyone’s Prestige Beauty & Fragrance products. Think Net-a-Porter for Beauty. 

I get why these old-school mega brands launch portfolio sites highlighting their brands, but I never understood why it isn’t an eCom store where customers can buy.

My guess is the customer buying Gucci perfume will also buy Burberry or Marc Jacobs Beauty products in the same order. 

But instead of making customers go in store, they could easily launch the marketplace with just the 35 brands they currently own then expand from there. The Sheer promotional power of:

• Kim Kardashian

• Kylie Jenner

• Katy Perry

Would generate millions of sessions from the announcement alone. 

When you boil down Coty’s actual biz model, they’re a licensed manufacturer. They’re the product experts other brands come to when they want to enter Beauty & Fragrance but can’t do it themselves. The existential risk of that model is you get squeezed out by the Brand and Retailer.

Coty has done an incredible job maintaining their margins throughout that dynamic, but eventually, when push comes to shove, both sides will need more margin. Unless they can provide a new opportunity (net new sales channel) to partners.

Opening up a marketplace shifts Coty’s strategic positioning.

Then, when new licensors or up-and-coming brand want to partner with Coty, they won’t choose Coty > LVMH/Estée Lauder for their production capabilities or retail relationships, but because Coty can own every step of the process for your brand.

Now this might sound kind of like a side quest, but the era of DTC as a mandatory channel is here to stay. Coty already appreciates this, acquiring Kylie Cosmetics, SKYNN, and launching Kylie Baby.

Once the marketplace hits critical mass, pull the unexpected move. Add brands from LVMH & Estee Lauder. It will create a flywheel where Prestige Beauty & Fragrance consumers come to find the best products, and Beauty & Fragrance brands will want to partner with Coty.

Takeaway: Cross-sell across the portfolio to open a DTC relationship.

Final Thought

I have to give Coty credit. They really own what they do and do it well. It’s hard for a 120-year-old biz to stay so focused and crush 1-2 activities over the years, but that’s also what makes a monstrous biz so successful. 

Maniacal focus.

It’s so easy to get excited and extend into areas that aren’t a core expertise or share the limelight with others. But that comes down to the seminal question for all biz owners.

Do you want to be rich or famous?

Coty picked rich.

And it’s worked out well for them. Over a century, they’ve fended off LVMH, Estée Lauder, and L’Oréal from encroaching, secured licensing agreements from the most respected Luxury brands in the space and stayed in its lane.

That isn’t easy. I’m sure there have been times in the biz’s history where getting into Apparel or other categories seemed like the obvious extension.To stay disciplined and only build what they’ve mastered is their real key to sustained success.

It’s a great reminder that sustained compounding success in the right field is much more valuable than a high amount of activity. Big numbers get MUCH bigger over time.

🧠 The Takeaways

We’re buying this biz, shedding the neglected stepchild portfolio to pay down the debt, and riding the Prestige brands to an 80x P/E ratio and a $40B exit.

1. When one biz unit dominates the other, really ask yourself if the smaller, less profitable unit is worth it.

2. More expensive products + better customers = cash cow.

3. If you acquire bizs to create synergies, sell across the portfolio.