2017 Odlum Brown Annual Address
One of the world’s great civilizations was ancient Egypt. The Egyptians made breakthroughs in areas ranging from science to medicine to construction. We also know from history that the Egyptians took great pride in their appearance.
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Women would use minerals as makeup and both men and women wore scented oils.
People in almost every society since then have used some form of beauty product, and the reason for this is a deep evolutionary desire to be attractive.
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Today, the beauty industry is highly profitable and is still growing at a good pace. The desire to be attractive isn’t going away any time soon.
This all creates a good backdrop for our favourite beauty company.
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Coty.
You may not know the name Coty, but you will know its brands.
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Image Source: Coty
Cover Girl, OPI, Hugo Boss, Marc Jacobs and the many others you see on the screen. Now, an important side note, Coty does not sell handbags or clothing – they only sell cosmetics and fragrances.
They have a terrific collection of brands and we see a lot of potential ahead for the company.
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Source: JAB Holding Company
We’ll start with the people behind Coty because they’re a big reason for optimism.
Coty is 36% owned by JAB Holding – this is a family controlled investment company run by Peter Harf, Olivier Goudet and Bart Becht – three outstanding business people.
JAB has built multiple businesses.
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The one you’d know best is Reckitt Benckiser – owner of French’s mustard and Lysol sprays.
Reckitt Benckiser is based in London and went public in 1997.
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Source: Market Q
If you had invested $10,000 in the London market at that time, you’d have a over $32,000 today.
If you had invested the $10,000 in Reckitt Benckiser, you’d have over $360,000 today.
Reckitt has been one of the U.K.’s best performing stocks.
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JAB acquired Coty in 1992.
At the time, Coty was a relatively small beauty company with sales of about $300 million. That was a fraction of the industry leaders.
But JAB had big ambition.
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They bought a number of beauty companies in the 90s and by the turn of the century, Coty was doing $1.5B in revenue.
In the 2000s, acquisitions continued and Coty did a tremendous job growing the businesses they bought.
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Image Source: Coty
Take Marc Jacobs.
Coty bought this fragrance license in 2003, and since then sales have increased more than 800%.
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By 2015, Coty had reached $4.5 billion in revenue.
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Last year, they stepped up again.
They bought Procter & Gamble’s beauty business – Cover Girl, Hugo Boss, Gucci.
Coty’s revenue doubled. They’re now at $9 billion and they’re the 3rd largest beauty company in the world.
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The P&G acquisition provides Coty a tremendous opportunity to boost earnings per share.
There’s a lot of opportunity to lower cost by taking advantage of size, and there’s a lot of fat in the P&G business for Coty to go after.
JAB likes to run their companies lean. In fact, if you go to JAB’s head office in London, you’ll walk on plastic flooring and sit on IKEA furniture.
Over the next four years, we think Coty can boost its earning per share by about 50% −and that’s just from improving their cost structure.
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One area Coty will not cut is investments to grow the business – areas like marketing, distribution, talent and acquisitions. Coty will continue to invest heavily to grow.
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For example, Coty recently bought a digital marketing company called Beamly. Beamly is an expert at social media. People are spending more and more time on sites like Facebook, Instagram and Twitter, and Coty is spending heavily to reach these people.
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Last year, Coty bought a leading Brazilian beauty company called Hypermarcas.
Brazil is a terrific market for beauty – it’s already one of the largest in the world. As incomes grow from still low levels, the market should only get bigger.
Coty significantly enhanced its scale and distribution with this acquisition – and they did it with Brazil in a deep recession – what better time to be buying?
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These and other investments are setting the stage for Coty’s next wave of growth. There’s a lot of potential.
And the best part is, you’re not paying for it.
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Coty has hit some bumps in the road. That’s something that happens to all companies from time to time. When it does, Wall Street tends to lose patience and the stock sells off.
We love it when that happens because you can buy great companies at a discount.
That’s where we are today with Coty. The stock is cheap.
These tremendously talented people are building a profitable, fast growing company – and no one cares. Well, we do. And, we think it’s going to pay off really well.
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So, Coty is in a good industry.
It has exceptional management. It has a history of growth. There’s a lot of opportunity to boost earnings from the P&G acquisition.
Coty is investing heavily in their next wave of growth. It has a great future. And, you’re not paying much for it today.
That may be the definition of true beauty.
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