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Understanding Coty’s Skin and Body Care Segment

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Nov. 9 2015, Updated 12:04 a.m. ET

Skin and Body Care segment overview

Coty’s (COTY) skin and body care products include shower gels, deodorants, skin care, and sun treatment products. Adidas, Lancaster, philosophy, and Playboy are some of company’s well-known skin and body care brands.

Lancaster and philosophy are Coty’s owned brands that are sold in prestige distribution channels. Adidas and Playboy, which are licensed brands, are sold in mass distribution channels.

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Decrease in revenue

The Skin and Body Care segment accounted for 17.6% of Coty’s total net revenue in fiscal 2015. The segment’s revenue decreased 10% to $0.77 billion in fiscal 2015[1. Year ended June 30, 2015] compared to $0.86 billion in fiscal 2014.

The decrease in the segment’s revenue was primarily due to a 9% decline in unit volume and a negative foreign currency impact of 6%. This was partially offset by a positive price and mix impact of 5%. The discontinuation of the TJoy and China Optimization products contributed 3% to the segment’s unit volume decline and positively impacted its price and mix by 4%.

In addition, the sales decrease was primarily due to lower revenue from Adidas and Playboy. However, partially offsetting these declines was the launch of the Adidas UEFA Champions League Edition products, as well as incremental revenue in Brazil due to the commercial distributor relationship with Avon (AVP).

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Impairment charges

Operating income for Coty’s Skin and Body Care segment increased $370.4 million from -$337.3 million in fiscal 2014, primarily reflecting asset impairment charges of $316.9 million in fiscal 2014. This was due to asset impairment charges of ~$0.32 billion, recorded in fiscal 2014, which reduced operating income in that year.

The impairment represents the write-off of goodwill, identifiable intangible assets, and certain tangible assets associated with the Beauty: Skin & Body Care reporting unit which is included in the Skin & Body Care segment.

Global distribution

Coty manufactures ~71% of the skin and body care products at its own manufacturing facilities. The company’s products face stiff competition from other products like Palmolive Shower Gel (CL), Dove (UL), and Olay (PG). As a result, Coty aims to distribute products globally through subsidiaries and third-party distributors.

COTY has exposure in the Vanguard Consumer Staples ETF (VDC), with 0.2%[2. Updated as of October 2, 2015] of the total weight of the portfolio.

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