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Title: Coty to write down $3 billion in assets as it restructures, shares tumble

Source: Reuters

By: Aishwarya Venugopal

(https://www.reuters.com/article/us-coty-restructuring/coty-to-write-down-3-billion-in-assets-as-it-restructures-shares-tumble-idUSKCN1TW2RH)

 

Coty Inc (COTY.N) said on Monday it would write down about $3 billion in value of brands acquired from Procter & Gamble Co (PG.N), as the struggling cosmetics maker laid out a four-year restructuring plan, sending its shares down as much as 19%.

 

Coty splurged more than $12 billion to buy P&G’s perfume, hair care and make-up businesses, including CoverGirl, Max Factor and Clairol, in 2016 to scale up its beauty business, but has since struggled due to supply chain disruptions in Europe and the United States and competition from nimbler rivals.

 

Sales in the consumer beauty division have fallen in the past four quarters, as the company wrestles with competition from more affordable and Instagram friendly brands such as NYX, Kylie Cosmetics and ColourPop.

 

“If we are able to stabilize our share in this moderately declining category, this will allow Coty to return back to growth,” Coty Chief Executive Officer Pierre Laubies said on a call with analysts.

 

Coty expects the writedown to be reflected in its 2019 results. It had taken an impairment charge of about $1 billion related to some brands in the segment earlier this year.

 

The restructuring plan will reduce organizational layers and reorganize the operation into regional units with new business heads, the company said, adding that it had secured funding from lenders. Coty, however, did not disclose the impact of restructuring on jobs.

 

“Overall, the fiscal 2023 goals seem ambitious, especially considering Coty’s recent execution challenges and it is now up to the new management team to deliver,” Wells Fargo analyst Joe Lachky said.

 

Coty will also move its management headquarters to Amsterdam from London, saying it is a “cost-efficient and tax stable location” and brings the company closer to its main markets.

 

“Some may have also been hoping for larger portfolio changes, or a major M&A announcement,” Lachky said. Coty on Monday declined to comment on reports that it would acquire a stake in reality TV star Kylie Jenner’s makeup brand Kylie Cosmetics…

 

 

Required:

What potential earnings management strategy has been adopted by Coty in the article above? Explain your argument. What will be the future implications of this earnings management plan for the earnings of Coty?

 

(6 mark question) 

- potential earnings management strategy (evidence from article that leads you to believe this) 

- future implications of this earnings management plan 

Answer
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