Coty's case

Risk #1: Joint Venture Integration Risk

Attendees: Heloise Letellier – International Marketing Director, Kylie Skin

Nicolas Tordjman – SVP Global Integration, Jenner-Kardashian Brands

Description: Coty recently purchased 51% of Kylie Cosmetics and 20% of KKW Beauty, both

designed to leverage the celebrity status of respective owners Kylie Jenner and Kim Kardashian

West. Kylie Cosmetics has been relaunched with a focus on clean, vegan formaulas. KKW has

been relaunched with a focus on direct to consumer (DTC) marketing. Both franchises have

been tarnished by subsequent legal wrangling with key supplier Seed Beauty over allegations of

intellectual property theft. The relaunches are implicit acknowledgments by Coty that the

company is struggling to realize the value initially estimated in the deal prices.

Scenario 1: The relaunches of both product lines do not gain traction despite the popularity of

the underlying celebrity names. Coty and brand management become misaligned in key product

development initiatives, leading to issues in both product formulas and DTC distribution. The

reputation of the product lines rapidly deteriorates due to poor quality and logistical failures.

Likelihood: 15%

Financial impact:

 In the Americas segment, luxury/prestige cosmetics sales volume for in store sales is 2.5%

lower than baseline for year 1, rising linearly to 10% below baseline in years 4 and later.

Online sales store volume is 5% lower than baseline in year 1, falling linearly to 20% below

baseline in years 4 and later.

 In the Americas segment, luxury/prestige cosmetics prices for all sales modalities are 7%

lower than baseline in years 3 and later.

 In the EMEA segment, prestige cosmetics sales volume for in store sales is 1.5% lower

than baseline for year 1, falling linearly to 6% below baseline in years 4 and later. Online

sales store volume is 3% lower than baseline in year 1, falling linearly to 12% below

baseline in years 4 and later.

 In the EMEA segment, prestige cosmetics prices for all sales modalities are 4% lower

than baseline in years 3 and later.

 For the Americas and EMEA segments, COGS as a percent of sales is 1.5% higher than

baseline in years 2 and later.

Risk #2: Economic Downturn Risk

Attendees: Neil Cecconi – Senior Planning Manager

Corinne Ercegovic – Director, Corporate Finance

Recent economic indicators show a significant rise in inflation in the U.S., with the annualized

rate at about 8% for the first half of 2021, after being about 2% for the last 2 decades.

Furthermore, Bank of America recently published a report that higher than average inflation

would go on for the next 2 to 4 years due to all of the government stimulus and growth in asset

prices such as the housing market. Meanwhile, central banks around the globe continue to keep

interest rates low as world economies struggle to find their footing with the pandemic. The

combination of high inflation and low interest rates threatens real incomes and dampens

consumer spending, especially for discretionary purchases such as Coty beauty products.

Scenario 1: Inflation in the U.S. remains between 4% and 6% for the next 4 years. Interest rates

gradually rise in response. However, negative real interest rates persist for most of that time.

The stagflationary environment raises the cost of goods sold for Coty but lagging consumer

demand permits Coty to only pass 50% of the increased costs into their prices. European and

Asian markets experience less severe stagflationary problems.

Likelihood: 30% to 40% likelihood, or about 1 in 3

Impacts:

 For the Americas, inflation and wage growth are 3% above baseline in years 1 through 4.

Net earned rates and debt interest rates are 0.75% higher than baseline in year 1, rising

linearly to 3% higher than baseline in year 4, and then falling linearly to baseline in years

8 and later. For the EMEA and APAC segments, inflation and wage growth are 1.5%

above baseline in years 1 through 4. Net earned rates and debt interest rates are 0.375%

higher than baseline in year 1, rising linearly to 1.5% higher than baseline in year 4, and

then falling linearly to baseline in year 8 and later.

 For the Americas segment, sales volume for prestige/luxury products is 8% below

baseline in year 1, 20% below baseline in years 2 and 3, and 15% below baseline in year

4. Sales volume for mass products is 4% below baseline in year 1, 10% below baseline in

years 2 and 3, and 8% below baseline in year 4.

 For the EMEA and APAC segments, sales volume for prestige/luxury products is 4%

below baseline in year 1, 10% below baseline in years 2 and 3, and 8% below baseline in

year 4. Sales volume for mass products is 2% below baseline in year 1, 5% below

baseline in years 2 and 3, and 4% below baseline in year 4.

 For the Americas segment, price per unit for all products is 0.75% above baseline in year

1, rising linearly to 3% above baseline in years 4 and later. For the EMEA and APAC

segments, price per unit is 0.375% above baseline in year 1, rising linearly to 1.5% above

baseline in years 4 and later.

 For the U.S. segments, COGS as a percent of sales 1.5% above baseline in year 1, rising

linearly to 6% above baseline in years 4 and later. For the EMEA and APAC segments,

COGS as a percent of sales is 0.75% above baseline in year 1, rising linearly to 3% above

baseline in years 4 and later.