Cosmetics sales have cratered but the real story is how fake numbers fooled the experts enough to hand over real cash for an illusion.
When venerable cosmetics giant Coty paid $600 million cash last year to buy into Kylie Jenner’s upstart lipstick brand, the hype should have triggered alarms on Wall Street.
The smart money evidently heard the sirens. Coty’s stock has collapsed 60% since the deal was announced, destroying $7 billion in market capitalization.
The giant traded real cash for a dream and burned shareholders in the process. No wonder the CEO left a few months ago.
Good for Kylie. But it’s rarely a good thing for anyone else. And since she should have had oversight on the numbers, she’s facing liability too.
Shareholder lawsuits have begun
Kylie’s people bragged that her company did $400 million in sales in the first year and a half and that she drew a $250 million dividend over that period.
That payout is enormous but helped to support the Kardashian family’s claims that Kylie was personally on track to become the world’s youngest billionaire.
Hitting that arbitrary target was the only thing that mattered to them, evidently. She threw a big party when it happened.
But it’s starting to look like the numbers were doctored to an extreme degree. When Coty took over the books, it had to post real revenue to satisfy the SEC.
Kylie really only did $177 million in sales last year. The only way that happens is that either the initial reports were grossly inflated or the business was in steep decline when she sold.
Coty touted the acquisition as a growth driver, which means management has to have known how modest the operation really was.
We have to assume they did their due diligence and didn’t buy in on faith alone. And that’s still a real problem because they paid a huge premium for what they theoretically knew they were getting.
Half of Kylie translates into $85 million in annual sales. If that cash flow was worth $600 million, Coty management cheerfully paid 7X sales when their own stock was barely worth a 1X multiple.
Even at the inflated revenue levels, buying back COTY would have been a better use of shareholder capital. Management made an objectively bad call here.
The class action firms are circling. It’s going to get ugly. Arguably it deserves to get ugly.
Teaming with a bad actor
Some people are fretting about being stripped of real billionaire status hurting Kylie’s personal brand, which in the end is the only thing that really pushes cosmetic sales.
I think that’s only the tip of the reputational iceberg here. The real issue is that Coty willingly teamed up with someone who they have to have known was cooking the books for publicity.
You can do business with someone like that on a handshake basis, but that isn’t going to satisfy SEC requirements or, ultimately, corporate boards.
Kylie might not have lied. She can plead ignorance or that she was manipulated. She can point fingers.
But here’s the thing: she still owns close to half of that company and has half the board representation. Coty has to keep working with her or buy her out.
That’s the real noose around their necks right now. And reading between the lines, it’s the real reason their stock has cratered. They took a $10 billion company and gambled on a dream.
They lost. It happens. Some bigger rival with better instincts will be around when it’s time to pick up the pieces.
A truly disastrous quarter
Kylie, meanwhile, has the $600 million. She reportedly paid around $250 million in tax, which demonstrates a combination of bad planning and surprise that anyone with deep pockets would actually take the company seriously.
Someone serious would have shielded the equity from that capital gains windfall a little better. Her mother Kris evidently did that by diverting her small stake into a trust.
Of course we don’t know if Kylie really paid the tax at all. We can’t trust any of the family’s financial proclamations now. They apparently even forged IRS returns to show that huge $250 million profit when the company started.
What we know is that the company just isn’t generating massive cash flow. Coty reports that its share of Kylie’s sales last quarter came to $37 million, which isn’t bad in itself.
The nightmare is that that slice of the business only earned $1.8 million after expenses. Margins have collapsed.
At most, that’s what Kylie could have taken back from the operation last quarter. For a supposed billionaire, that’s literally not even worth getting out of bed.
Coty could have sunk that $600 million in Treasury debt paying 2% last year and gotten a better outcome for shareholders. It’s a fiasco.
And again, it’s a long way from the $250 million profit Kylie allegedly booked in the company’s first year. In fact, it’s mathematically impossible to reconcile these numbers with the original PR claims.
Figure Kylie is still booking $300 million a year in revenue and that’s kicking back close to $30 million a year in profit. Five years ago, a 15% slower run rate somehow supported margins six times as rich.
The charitable response is that the company is now burning cash to sustain its growth, effectively giving lipstick away. I’d love to see the business plan. Coty, if you’re listening, get in touch.
Otherwise, it looks like the Kardashians traded a fantasy for real money. It’s what they do.
Fantasy doesn’t pay the bills. It doesn’t support much of a lifestyle or leave a lot of wealth behind. I wouldn’t be surprised if a lot of celebrity net worth numbers weren’t equally inflated by a world that wants to buy into the dream.
But we can see here exactly what that does. Coty paid $600 million for the dream. Shareholders are out $7 billion so far. What Kylie does with the windfall remains to be seen.