By Tonya Garcia, MarketWatch
Coty Inc. announced Monday that it will take a 51% stake in Kylie Cosmetics, the blockbuster beauty brand from Kylie Jenner, for $600 million.
The deal values Kylie Cosmetics at $1.2 billion.
Together they will focus on global expansion of the brand, with Jenner and her team maintaining the lead on products and communications, including social media.
Coty /zigman2/quotes/208645074/composite COTY +2.33% expects the transaction to add to net revenue growth by more than 1% annually over the next three years, and be neutral to earnings per share in the first year, but add to EPS thereafter. Kylie Cosmetics had estimated revenue of $177 million for the 12 months prior. The deal is expected to close in the third quarter of fiscal 2020.
Jenner’s brands are Kylie Cosmetics and Kylie Skin, which launched in May and initially sold out in 10 hours. Coty says Kylie Skin is on track to reach about $25 million in sales for calendar year 2019.
Coty will act as a licensee for skincare, nail products and fragrances.
Jenner was featured on the cover of “Forbes” magazine this year as the youngest self-made billionaire, to much controversy.
Coty is in the midst of a shift that could include the off-loading of its Brazilian operations and professional beauty business.
On the conference call for the deal, Coty’s Chief Financial Officer Pierre-André Terisse noted that this deal falls into the “transformation” portion of the strategic plan, with the company taking steps towards reaching the “growth potential of our portfolio.” The new Kylie brands expand the company’s presence in the premium cosmetics and skincare categories.
“Underpinning the success of the Kylie Beauty page is the incredible social media reach of Kylie Jenner herself,” Terisse said, according to a FactSet transcript.
Jenner has more than 270 million followers across her personal social media channels.
“To put this into perspective, with a single post, she’s able to reach more than double the number of people who watch the Super Bowl every year,” he said.
Wells Fargo analysts note that hanging on to that social media star power is important for the success of the partnership.
“Positively, Kylie is one of the fastest growing cosmetics brands and the transaction should greatly expand Coty’s presence in the specialty and e-comm channels,” analysts led by Joe Lachky wrote in a note. “Importantly, Kylie also retains sufficient ownership in the partnership, which should encourage her to remain engaged with the creative and communication initiatives.”
The analysts say the transaction is a positive, but they maintain their market perform rating for Coty shares.
“There have also been reports that growth for the brand has plateaued and the transaction expands Coty’s presence in makeup, where category growth has recently slowed,” the note said. “While financial implications will be somewhat limited, this transaction along with Coty exploring strategic options for professional beauty shows that management is moving quickly and aggressively to evolve its portfolio to faster channels.”
Deutsche Bank analyst Faiza Alwy also notes a reported decline in Kylie Cosmetics sales and a decline in “prestige” makeup overall, with more promotions this holiday season.
“Kylie Cosmetics is now lapping its entry into Ulta (in November), and it seems unlikely the company will be able to sustain its growth trends after that,” Alwy wrote.
Deutsche Bank rates Coty stock hold.
Coty stock is up 2.6% in Monday trading, and has rallied more than 86% for the year to date while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.30% is up 24.5% for the period.