Coty Inc. (COTY) on Q2 2021 Results - Earnings Call Transcript

Operator: Good morning, ladies and gentlemen. My name is Laurie and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Second Quarter Fiscal 2021 Results Conference Call. As a reminder, this conference call is being recorded today, February 9, 2021. On today's call are Sue Nabi, Chief Executive Officer; and Laurent Mercier, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC where the Company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, except where noted, the discussion of Coty's financial results and Coty's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the Company's release. Sue Nabi: Ladies and gentlemen, having completed another quarter, I'm very pleased to share with you the substantial progress Coty has continued to make strategically, financially, and on its organization. This amplifies the improvements Coty made in the first quarter and confirms that Coty is emerging from the COVID-19 crisis much stronger, more nimble, and well positioned to capitalize on the eventual market recovery. Our Q2 profit and net debt came in well ahead of expectations. First, our adjusted operating income and EBITDA grew high single digits versus last year as we continued executing on our cost reduction program with approximately $80 million of savings delivered in the quarter consistent with the first quarter. The strong savings delivery in the first half of '21 coupled with the acceleration of certain projects into the year give us confidence to raise our savings target for the year to approximately $300 million compared to the previous target of over $200 million. At the same time, the successful closing of the Wella transaction and strong free cash flow drove our financial debt down to $4.8 billion with an economic net debt of $3.6 billion when taking into account the value of our retained Wella stake. At the same time despite the resurgence of COVID and related lockdowns in multiple parts of the world, we delivered Q2 revenues in line with expectations including a 1 percentage point improvement in like-for-like trends to minus 18%. Most importantly, we made tangible progress on our strategic priorities, which as you recall include one, moving our e-commerce business from a catch-up mode to a momentum mode; second, building out our presence in China; three, strengthening our foothold in white space opportunities including prestige cosmetics and skincare; four, building market leading innovation and as a result, strengthening our core prestige fragrance business and stabilizing market share in our mass beauty business. Building on the progress last quarter, we continued to strengthen our executive leadership team in recent months including Stefano Curti joining as Chief Brand Officer for Consumer Beauty, Alexis Vaganay promoted Chief Commercial Officer for Consumer Beauty, Laurent Mercier elevated to Coty CFO, and Stephane Delbos promoted to Chief Procurement Officer. The new Coty team is now in place bringing strong beauty and business experience, deep knowledge of Coty, and relevant knowledge of new areas like skincare. At the same time, we are supported by a strong and female majority Board of Directors, including the recent addition of two new directors, Anna Adeola Makanju and Mariasun Aramburuzabala Larregui. So, let me now spend some time reviewing our recent revenue trends as well as provide more details on our strategic progress. Our second quarter sales came in in line with expectations even as the environment was disrupted in many parts of the world by a resurgence of COVID-19. Laurent Mercier: Thank you. Sue. Having been with Coty for the three years in different capacities, I had the pleasure to work closely with Pierre Andre for the past two years. I am excited to continue building on what we started together and lead as CFO this next phase of growth and transformation. Before I go into our profit delivery for the quarter, let me first touch on how we will be measuring and discussing our performance going forward. First, we will now use adjusted EBITDA as our main KPI for profits with EBITDA based on adjusted operating income plus depreciation and non-cash stock compensation in order to moderately drive and highlight our focus on cash flow and deleveraging, which remain key priorities. Second, we have decided to recognize our retained 40% Wella stake on a fair value basis going forward recording only the changes in fair value in the P&L. With this in mind, let's turn to the shape of the P&L in Q2. Our Q2 gross margin of 58.7% was stable with Q1'21 and in line with fiscal year '20 average. The adjusted operating income of $188 million for continuing operations was well ahead of consensus expectations of approximately $160 million. This translated to adjusted EBITDA of $284 million for continuing operations with a margin of 20.1%, up 400 basis point year-over-year. Including our Wella cost reimbursement, the adjusted EBITDA totaled $294 million or a 20.8% margin. The achievement of 6% profit growth despite double-digit sales decline and stranded cost was supported by the combination of a, very focused marketing investment at approximately 20% of net revenues and in line with Q1 as we continued our pay as we go marketing deployment strategy; and b, strong fixed cost reduction as part of our broader cost reduction program. Looking at our cost reduction progress in more detail. In Q2 our fixed cost decreased by 12% year-over-year. We achieved approximately $80 million of savings in Q2, a level consistent with Q1. As a result, we have achieved $160 million of savings year-to-date. The biggest component of the savings delivered in H1 '21 has been headcount reduction accounting for close to 30%. Beyond that, the biggest contributors have been significant cuts in business services including consultants, recruiters, IT, real estate, and facility management cost followed by direct and indirect procurement savings across cost of goods and A&CP. And while not impacting fiscal year '21 savings delivery, we recently announced the consolidation of our fragrance manufacturing footprint with the closing of our German plant to be completed by summer 2022. This was a difficult decision to take, but a necessary one to address the overcapacity in our supply network. This consolidates our fragrance manufacturing to two remaining plants in Spain and France. The strong delivery in H1 '21 coupled with the acceleration of certain projects into the year are driving an increase to the savings target for fiscal year '21 now expected to be approximately $300 million compared to the previous target of over $200 million and we remain on track of our saving target of $600 million by end of fiscal year '23. Turning now to EPS. With adjusted EBITDA for the quarter of $284 million less $96 million in depreciation and non-cash stock compensation, close to $60 million of interest expense, an 8.5% adjusted effective tax rate, and two months of net income contribution from Wella; the Q2 diluted adjusted EPS for total Coty ended at $0.17. For H1 '21 based on $450 million of adjusted EBITDA, $180 million of depreciation and stock compensation, roughly $120 million of interest expense, and an adjusted effective tax rate of 12.5%; the diluted adjusted EPS for total Coty ended at $0.28. In the same period, the reported EPS came in at a negative $0.10 impacted by the Wella transaction cost and restructuring accruals under the cost reduction program. To help frame the various puts and takes in EPS going forward, there are a few things to keep in mind. First, it's worth noting that while depreciation is likely to stay fairly steady, the stock compensation component will step up beginning in Q3. Second, on the tax line, we've had a few positive discrete items in H1 '21; but for the year, we continue to expect an adjusted effective tax rate in the low 20%s. Third, as stated earlier beginning in Q3 we will not show the earnings of Wella in our P&L, but we'd instead record any changes in Wella's fair market value. And finally, on the convertible preferred stock, so far we have been opting to include a coupon resulting in incremental dilution. However, going forward we intend to pay the coupon in cash allowing the diluted share count to stabilize. Looking now at free cash flow for the quarter, which came in very strong at approximately $390 million, up $26 million versus the prior year. Underpinning this solid performance was strong operating income and EBITDA for the quarter coupled with two months of contribution from Wella. We also continued our strong working capital and CapEx management in the quarter, including material reduction in overdues. At the same time, it's important to point out that the completion of the Wella transaction within the quarter and the finalized working capital transfers resulted in $200 million of positive working capital benefit in Q2, which will reverse next quarter. Turning now to our capital structure. I'm happy to report that with the successful completion of the Wella transaction with gross proceeds of $2.9 billion and our strong free cash flow of $389 million, our net debt at the end of Q2 stood at $4.8 billion. This in fact included over $300 million of negative impact on our debt from foreign exchange. And factoring in our retained stake in Wella valued at quarter-end at approximately $1.2 billion, our economic net debt fell to approximately $3.6 billion. We also maintain comfortable headroom under our financial debt covenants. Our capital structure remains very attractive with key maturities in 2023 and 2025 and the cost of debt below 4%. It is important to highlight that with our net debt closing below $5 billion, this is a true milestone for Coty and sets up for continued improvement in the coming years. Turning now to our fiscal year '21 outlook. Despite continued disruption to sales channels and short-term orders related to the COVID-19 pandemic, we remain focused on our strategic priorities. With cost savings expected to reach approximately $300 million for this fiscal year and having in mind revenue trends and our intention to step up investment, we now expect adjusted EBITDA of $750 million for fiscal year '21. With the financial net debt that has now crossed below $5 billion, we will continue to drive our leverage ratio towards 5 times by the end of calendar year '21, in line with our prior guidance. Let me now turn it over to Sue for some concluding remarks. Sue Nabi: Thank you very much, Laurent. With the new Coty team now in place, it's clear to me that a stronger Coty is continuing to emerge. In the current volatile context, our focus is on optimizing short-term revenues and of course sell-outs. Yet as we continue to control our costs and debt, we are shifting our focus now to accelerating our topline guided by our strategic pillars. One, digital and e-commerce acceleration; second, building out our presence in China; three, expanding into white space opportunities including prestige cosmetics and skincare; and of course strengthening our core fragrance and cosmetic businesses through leading innovation and improved execution. The additional fiscal '21 cost savings will enable the profit delivery we have guided to while at the same time increasing our commercial investment in the second half of fiscal '21. In fact we are like a boat setting sail now and letting go all of excess weight. The lighter we emerge from this crisis, the faster we will go knowing how desirable many of our brands are. As we have finalized our strategic review including new growth opportunities, brand equity mapping, and a repositioning plan for our core mass brands; we plan to share our strategic priorities around accelerating growth in mid-April with a full Investor Day planned for fall 2021. I'm really excited by the tremendous opportunities and exciting journey ahead for Coty and look forward to sharing this vision in the coming months. Thank you very much for your time and we are now pleased to take any questions. Operator: Thank you. Our first question comes from the line of Olivia Tong of Bank of America. Olivia Tong: Thanks. Good morning. First wanted to ask about cost and then wanted to ask about China. First on costs, can you just talk about what drove the incremental savings? Is it additional headcount reductions, more manufacturing consolidation, advertising media efficiencies? And then can you talk about the redeployment of that investment toward investment to drive growth in key markets or channels like e-commerce? And now that you have four months left in the year, what's your view in terms of getting back to margins more in line with 2019? And then I have a follow up. Thank you. Laurent Mercier: Okay. Hello, Olivia. So on costs or incremental savings, as I explained, is really across all initiatives. So we really continue to intensify on headcount reductions, but also on all non-people cost. So, we continue the journey and we really accelerate all the actions we initiated in H1. So it's not one specific bucket or another, it's really all across the board. So, now to answer your question on margins. Definitely what we are aiming at is a high single digit and you see the result in H1 which confirms this trajectory. Olivia Tong: Great. Thanks. And then I wanted to talk a little bit about the expansion of Gucci Beauty on to Tmall and your view on the opportunity there. If there are other brands in your portfolio that you think could resonate particularly well in China and how much investment you think that would necessitate in your view. And then just also what about the social media brands like Kylie and KKW? How do you think about their potential in China and then overarchingly how do you think about the opportunity for profitability long term in China? Thank you. Sue Nabi: Hello, Olivia. This is Sue speaking. So, to answer the first question about China and the Tmall shop opening that we are doing at the moment. The great news is that we have now a range under Gucci Beauty brand, but the same thing under Burberry brand by the way; but on the Gucci brand, we have now a comprehensive range. We were operating in areas such as lipsticks, powders, pencils, mascara; which are I would say a tiny part of the market. And now with the launch of the new foundation 3D Beauty that's arrived in January, we are suddenly operating on the biggest chunk of the market and the results that we have had on Jan -- during January, which is the first month, are outstanding. We saw 35,000 units in a very, very little number of locations globally and especially in APAC and in China and the feedbacks are absolutely great about the product. And we of course are super excited by the new door that's opening because suddenly Gucci Beauty super desirable image and line is now plugged into a huge, huge I would say machine that's called Tmall pavilion that will give us the reach of 700 plus million users in China. So you can imagine when the super desirable brand that's putting on the market the best quality products on the right areas of the market meets the power of Tmall, there is clearly big potential for Gucci but also Burberry and overall for our luxury business in general. And clearly the next steps we are thinking about is how can we operate skincare in this area of the world, but also on Tmall. To answer your questions about Kim and Kylie. When it comes to Kylie Jenner line, the line is delivering consistently with the first quarter. Skincare is accelerating between the first and the second quarter globally and versus last year and we are at the moment adapting the products of Kylie line to the Asian Chinese market so that when we go there, we go with the right offer precisely for the I would say customers of this area of the world that has very, very specific needs. And when it comes to Kim Kardashian line, which is scheduled for fiscal '22, skincare line is going to be a line hopefully that's going to have everything that's needed to compete on the Chinese and Asian markets. Operator: Your next question comes from the line of Wendy Nicholson of Citi. Wendy Nicholson: Hi, good morning. My first question, Sue, maybe just has to do with the level of internal controls at the Company because I think historically one thing that made the story so frustrating was that often there was guidance given or there were targets for certain launches or expectations, but then the Company failed to deliver upon and they were saying it's like massive SKU assortment that the Company just didn't have any ability to manage. So I'm wondering just as you come in with your new management team, do you think you need to make investments in IT or infrastructure just so that when you're putting a lot of money behind something like CoverGirl, you have an accurate read on how that launch is doing just so that you can adapt and pivot and shift as need be? Sue Nabi: Hi. Wendy, Thank you for this question. So, you know we've been saying that since this I would say pandemic started, we've been really revisiting everything we are doing at Coty starting from the way we create products and nothing goes out if it's not, as I usually love to say, new better and different which is really something that was not the case in the past and a good way to avoid as you said overstocks is to do products that sell. This is I would say basic, but it was not -- probably not always respected in the past. The second thing we have been doing and we are doing on a monthly basis today is called pay as we go sessions. This is probably the first time. I don't know what's happening in other companies. But from my past experiences, it's the first time that this goes up to the level of the CEO with a top-down bottom-up way of working to make sure we are putting our money on bets that are really bets we all believe in. But not only believe in bets that have tests and studies and anything that needs to be done to confirm that we are putting money behind products and launches that are going to deliver and ideally overdeliver. And this is one of the main reason I have been sometimes postponing some of the launches because I thought they were not ready either in terms of formulation, in terms of cleanliness sustainability, or in terms simply of non-efficient advertising. So, this is really something that we are putting in place at the Company level -- at different levels of the Company and this goes up to the CEO level, which is I think unseen anywhere else. Wendy Nicholson: That's all fair and that sounds great and hopefully that works better than it has in the past. But my second question is kind of the biggest bare thesis on the stock right now is that you are cutting advertising to sort of make the numbers and show higher EBITDA growth in the short term, but that's not actually going to be good for the business. So, can you talk about kind of a target level of advertising? I know you said you expect to increase that. But in terms of your overall spending, do you think you have the right approach to investing in the business while at the same time managing to show EBITDA growth and that it's not going to be a trade-off between the two? Thanks so much. Sue Nabi: Thank you, Wendy. So as you know, as we said it earlier during the presentation of the results, the main areas where the spendings -- the main areas of cost savings were headcount reduction on one side and business services on the other side. We are doing everything to protect what we call the A&CP and specifically the working media. So as Laurent mentioned, the working media for the second quarter were in line with the ones from the first quarter around 20% A&CP in general and working media we try to preserve as much as possible. The good news is that during Q3 what we are targeting is being at the level in absolute value of what we have been spending in terms of working media during the year 2019, which is pre-pandemic. And this is really something that it's super, super important as you really -- as you have mentioned it and this is going to allow us to invest, I would say, in working media on fewer but bigger initiatives since we are going to be using amounts of money that are what we used to spend in normal years. So, it's a big change and this is again in a way correcting the feeling that you mentioned at the beginning of the question. We are not cutting on working media. On non-working media, we are doing a lot of renegotiation and what we call other A&CP which usually are about BAs and anything we do in stores. We are adapting to the situation of the different regions. As you can imagine, we've been super flexible to lower this bucket when it comes to Travel Retail and we are happy we've been able to do it because today stores are closed and we are doing exactly the same thing in other areas in the world where other A&CP can very very flexibly easily be resetted up or down. Operator: Your next question comes from the line of Andrea Teixeira of JP Morgan. Andrea Teixeira: Hi. Thank you and good morning. So Sue, I appreciate the comments about Kylie. But can you please elaborate more about the plans ahead and also to the Kim Kardashian skincare embedded in your outlook and the timing of those launches? And just as a second just a clarification on fragrances. What is the typical percentage of sales of fragrances in the month of December? I understand on a normalized basis about 50% so you seem obviously upbeat with the momentum in Gucci. And how confident you are with as you keep growing in this area offsetting the mass make-up declines in the next few quarters in spite of seasonally weaker performance and potentially destocking? Thank you. Sue Nabi: So to answer the first question, I'll do question after question. So, the first question is about Kylie and Kim Kardashian-West beauty businesses. So when it comes to Kylie, as you know we have recently -- there was a manufacturing agreement that has recently expired. So, we intend to launch a new cosmetics line under the Kylie Jenner beauty around next summer and this is clearly I would say the next step for this line. We continue to do our very successful drop model. This is really something that the Kardashians in general and Kylie Jenner specifically invented some years ago, which is a key driver of traffic and therefore sales on our DTC websites. So, we are continuing in this area and cosmetics line -- new cosmetics line arriving in next summer. When it comes to Kim Kardashian -- and again we are clearly positioning these two brands very differently. Kylie becoming a key destination for any beauty need when it comes to Gen Z and millennials. Clearly this is the way we are going to expand Kylie in the future and it's going to be across several categories and not linked to specific categories. When it comes to Kim, we are progressing very well hand in hand with Kim in creating hopefully a skincare line that's going to be again new, better, and different and bringing to her hundreds and hundreds of millions of followers around the world the ability to access the latest dermatological ingredient or I would say health -- skin health trends that her followers are looking for. So, this is what's going to happen on Kylie on one side and on Kim on the other side. When it comes to the fragrance business, this size of the business we think that the prestige fragrance category strength in certain market should continue seeing that the US and China through January are doing still very well. And the other reason that gives me confidence again we've been watching one key launch that we have done at Coty, it's Perfect by Marc Jacobs. As we said during the call earlier, this launch is probably Coty's biggest fragrance launch in the last 15 years and you have to think that the biggest fragrance launch happened in the middle of a pandemic. So, what made it the biggest launch in the history of Coty? It's simply because we've been shifting the way we do launches totally to a new mindset and new way of doing things. First, the advertising has nothing to do with the classical one spokesperson advertising that is usually I would say the common standard in the industry. We've been using 40 people from all ethnicities, ages, genders, whatever you want; and these people promoted the fragrance online. And for me, this has been a powerful way to replace the lack of store visits to test and smell the fragrance, if you listen and hear these people and their audiences sharing for those who bought online the products, they were sharing to each other why they love the scent, et cetera. In a way, there are visually inventing fragrance testing. So for me, is going to last -- I strongly believe is going to last. This campaign had on TikTok more than 10 billion views and it's clearly surpassing all TikTok standard, So, it shows us a new way to sell fragrances that's in a way not being stopped by the lack of testing that usually is the case when you launch a fragrance. So, I'm quite confident for the future on this topic. Operator: Your next question comes from the line of Steph Wissink of Jefferies. Stephanie Wissink: Thank you. Good morning, everyone. Our question is twofolded. First on gross margins, we're wondering, Laurent, if you can spend a little time just sharing with us where gross margins landed relative to your expectations? They came in a bit below where we were expecting and I just wanted to reconcile if that's partly related to the cost restructuring and where that's located within the P&L. And then secondly, on your EBITDA guidance for the year. I think you mentioned in your press release that the current quarter is pacing on trend in terms of where your sales expectations are. But could you help us think through again the body of the P&L and where we should expect some of the puts and takes between gross margin and OpEx as we look at the back half versus the first half? Thank you. Laurent Mercier: Okay. So hello, Steph. Thanks for your question. So gross margin, definitely -- I mean the big impact is related to COVID pandemic. So, it's definitely that of course lower volumes is impacting fixed cost absorption so -- and this is something that we had anticipated in our Q2 equation. It's creating also some tension on gross to net and also to some extent on mix. Of course as Sue mentioned, Europe is facing the lockdown and big markets and big brands. So, these are really related to the COVID-19 and we are anticipated it definitely in our equation. So, now definitely to answer your point on productivity. In our gross margin we have some positive productivity from supply chain and procurement and this is helping to mitigate part of the negative COVID headwinds. So, now building on what's next. Definitely step by step these negative COVID headwinds will disappear while at the same time the productivity and part of this $300 million savings will start to reflect in the gross margin improvement. So, this is just to give you some flavor on gross margin, but as you could see, we are in line with our Q1. So EBITDA guidance, so definitely the equation is really as we mentioned is definitely we are delivering the $300 million savings. So, this is really the work we are doing and we delivered $80 million in Q1, $80 million in Q2. Now what we are working together with Sue and the Executive Committee is of course as we mentioned with the pay as we go, we are reallocating some of these savings very targeted way through the actions which are working on the working media and where we have a very good way . And this is really the triangle we are building so savings, target investment, and then delivering the EBITDA that we are sharing with you today. Operator: Your next question comes from the line of Rob Ottenstein of Evercore. Robert Ottenstein: Great. Thank you very much. You identified digital initiatives I think as one strategic priority, which obviously makes a tremendous amount of sense. Can you talk about kind of where you are -- where you think you are in terms of your investment curve? Obviously this is an area that requires a lot of technology, a lot of upscaling of the workforce, kind of a general change of how you do business in general. So, perhaps if you can tell us kind of where you are in that progression, how much more you need to invest to get where you need to be? Thank you. Sue Nabi: Hello. Good morning, Rob. This is Sue speaking. So, you're right to say again that the e-com net revenues are growing superfast at Coty, plus 40% again. The penetration is today reaching the level of 19% clearly driven by our luxury business, but our mass business is also doing very well especially at e-retailers such as Amazon. And we have areas like Americas that are having plus 50% of growth, EMEA plus 30%; prestige, as I said it before, is driving the growth at plus 45% and mass is also plus 20%. In terms of what needs to go -- what is needed to go to the next step. As you know, we've been for the first time announcing the arrival of the first Chief Digital Officer at Coty, Jean-Denis Mariani, who joined the company in November. Jean-Denis is doing huge progress with his teams worldwide to put in place, what needs to be put in place in terms first of having all the assets that this area of the business is requiring. Some call it cause, it's about content and the right investment on the right assets, et cetera. So, this is something that we are going to accelerate in the next months and think about the best way to organize this in-house here at Coty. So, this is how I see it. It's clearly an area where there was wind behind us. We have the brands. Most of our brands had huge followings on Instagram. I was calculating the other day that if you add our own brands plus the fashion houses that we are working with and if you add also our I would say personalities, we have the reach of 700 million people. So if you add these 700 million people reach and you add next to it the new Tmall opening that we have just done for Coty in the last I would say two to three years, suddenly there is a direct way to address consumers that are as numerous as 1.4 billion people around the world. So, it's a super strong opportunity and you're right we'll need to finance this. This is clearly part of our key priorities. And pay as we go that Laurent mentioned several times, it's not only about where do we put our money in terms of advertising and clearly we've been shifting strongly media towards digital, it's also in terms of CapEx and investments for the future that we are doing exactly at this time of the moment. Operator: Your next question comes from the line of Lauren Lieberman of Barclays. Lauren Lieberman: Thanks very much. Good morning. I was curious if you could talk a little bit about the Singles Day shopping holiday. To what degree do you think that that contributed to some of the outsized performance in the quarter? But also I'm curious about activations and maybe it was too soon, right, with the Tmall launch more coming this quarter for Gucci. I'm curious about activations there and then also plans looking ahead to Lunar New Year and the degree to which -- maybe the business isn't quite there yet, but I was curious to learn a bit about that. Thanks. Sue Nabi: Good morning, Lauren. So you're right, we are doing a soft launch at the moment at Tmall. We are putting in place the different assets, the products, et cetera so we are not yet into this super high I would say promotional moments that are happening in China and in the Asian world. So, we'll see this hopefully happening. We'll see hopefully how we are going to benefit full potential from this launch at Tmall probably around the end of the third quarter, beginning of the fourth quarter. This is one. Second, we will need to find our way to be part of this highly promotional moment because we are operating highly desirable and highly I would say luxurious and prestigious brands. So, this is something that we are working hard to make sure we are still having the same level of excitement, et cetera without compromising the image of our brands. And we can -- of course we are starting to think about some other brands that are already into that game such as adidas or Calvin Klein, which are doing very, very big, but they are not at the moment big drivers of the growth in China. Operator: Your next question comes from the line of Faiza Alwy of Deutsche Bank. Faiza Alwy: Yes, hi. Good morning. So, a couple of related questions for you, Sue. First is how are you thinking about the evolution of the make-up category as we exit COVID? You've previously talked about this skinification of make-up and it does seem that every small make-up brand has launched a skincare brand. So, maybe you can talk about how this is impacting your approach to reinvestments because I do -- I hear you talking a lot about marketing and commercial investments which are apparent. But as we think about skincare in my mind at least, it seems like efficacy and performance really matters for consumer retention. So, would love to get your perspective around this. Do you agree with the premise and where do you think the Company is in terms of R&D expertise, product quality? And is there a scenario where you think more investments need to be made or are you satisfied with where you are? Sue Nabi: Thank you very much for your question. So, again thank you for asking me about R&D because this is really a topic that's dear to my heart. I'm an engineer so I love to spend time with R&D people and scientists and also with people who are operating our different factories. And what I've been seeing is really fabulous IPs owned by Coty R&D. I've been mentioning this probably in the previous call, but Coty owns key IPs in terms of long wear. If you take -- if you speak about make-up, the success of brands such as Outlast by CoverGirl, Lasting Finish 25 hours at Rimmel, or many others are clearly based on this uniqueness in terms of IP that we do own at Coty. We also own a lot of IPs when it comes to what I call protection --environmental protection be it from the sun, from blue light, or from pollution. And this is clearly something that the Company has been continuing to progress on thanks to Lancaster brand and we intend to expand this know-how to numerous number of brands, skincare but also make-up brands, that are being more and more skinificied in other words. And we have also IPs in the areas of dermatological -- I'm sorry, ingredients inspired by dermatology to make it simple and this area is an area where again Lancaster and Coty R&D has been operating for years and years. People are all talking about retinal since a few years now and it's going to be higher and higher and Lancaster for your information was the inventor of vectorization of retinal in a skincare product something like 20 or 25 years ago. So, this is really an area that the Company has know-how in, has expertise in, and has intellectual property in. So, we are going to build the skinification of make-up and the skinification of Coty business based on this key IPs that we own at Coty today. When it comes to the skinification of the make-up category, again what we are seeing is that what's doing well in our business are what we call clean, healthy, and sustainable alternatives. CoverGirl is leading the way in America in this area. Clean Fresh make-up Number 1 foundation launch in 2020 and then the Clean Fresh powder that we launched in September was the Number 1 powder and we are just launching right now Lash Blast Clean, the first mascara with clean vegan cruelty free formulation adapted for sensitive eyes, et cetera. So, this area of the business is clearly an area that's not only attracting I would say all consumers, but also strongly and over-indexing I would say Gen Z consumers and Hispanic consumers. So, this is an area that we intend to accelerate in the future thinking about skincare of course not only on our, I would say, color cosmetic brands; but also we can think about adidas, which is another brand of Coty portfolio where we see a huge potential in terms of self-care, body care, and anything around fitness beauty -- related beauty. So, this is the way I see the future of the Company. Confident on the ability to build on this -- and you said it, on this efficacy, ingredient-led, science-led categories in several areas of our businesses; mass beauty, adidas, but also in our prestige skincare with brands such as Lancaster and Philosophy, but also Kim and Kylie developing their future in skincare. Operator: Thank you. We have reached the allotted time for questions and answers for today. We thank you for participating in Coty's earnings conference call and webcast. You may now disconnect your lines and have a wonderful day.
COTY Ratings Summary
COTY Quant Ranking
Related Analysis

Coty Inc. (NYSE:COTY) Faces Changing Analyst Expectations Amid Competitive Beauty Industry

  • The average price target for Coty Inc. (NYSE:COTY) has seen a notable shift over the past year, indicating changing analyst expectations.
  • Recent earnings reports have fallen short of expectations, with a profit of $0.11 per share missing the Zacks Consensus Estimate of $0.22 per share.
  • Despite a decrease in the average price target from $10.44 a year ago to $5.00 last month, analyst Christopher Carey from Wells Fargo has set a more optimistic price target of $11, highlighting the potential impact of international revenue trends.

Coty Inc. (NYSE:COTY) is a global beauty company known for its wide range of cosmetics, skincare, and fragrance products. The company operates in a competitive industry with major players like L'Oréal and Estée Lauder. Over the past year, Coty has experienced a notable shift in its consensus price target, reflecting changing analyst expectations.

Last month, the average price target for Coty was $5.00, indicating a cautious short-term outlook from analysts. This sentiment aligns with Coty's recent earnings report, which fell short of expectations. The company reported a profit of $0.11 per share, missing the Zacks Consensus Estimate of $0.22 per share, as highlighted by Zacks.

Three months ago, the average price target was slightly higher at $5.83, suggesting more optimism at that time. However, Coty's second-quarter earnings report revealed a decline in earnings per share compared to the previous year, from $0.25 to $0.11. This decline may have contributed to the more conservative outlook from analysts.

A year ago, the average price target was significantly higher at $10.44. The substantial decrease over the year suggests analysts have become more conservative in their expectations for Coty's stock performance. This shift may be influenced by Coty's revised annual profit forecast, which was lowered after missing second-quarter revenue estimates, as reported by Reuters.

Analyst Christopher Carey from Wells Fargo has set a price target of $11 for Coty, reflecting the potential impact of international revenue trends on the stock's future performance. As Coty navigates these developments, investors are closely watching how the company's international operations will shape its prospects.

Coty Inc. (NYSE:COTY) Faces Financial Challenges in Q2 Fiscal Year 2025

  • Earnings per share (EPS) of $0.11, significantly below the Zacks Consensus Estimate of $0.22, marking a 50% negative earnings surprise.
  • Revenue for the quarter was approximately $1.67 billion, missing the estimated $1.72 billion and indicating a decrease from the previous year.
  • The company revised its annual profit forecast downward, now expecting an adjusted per-share profit between 50 and 52 cents, amidst declining demand for cosmetics in the U.S.

Coty Inc. (NYSE:COTY) is a global beauty company known for its wide range of cosmetics, skincare, and fragrance products. Despite its strong market presence, Coty faces stiff competition from industry giants like L'Oreal and Estée Lauder. The company recently reported its financial results for the second quarter of fiscal year 2025, revealing some challenges.

On February 10, 2025, Coty reported earnings per share (EPS) of $0.11, which was significantly below the Zacks Consensus Estimate of $0.22. This represents a 50% negative earnings surprise, highlighting the company's struggle to meet market expectations. Compared to the same quarter last year, when EPS was $0.25, this marks a notable decline. Over the past four quarters, Coty has consistently failed to exceed consensus EPS estimates.

Coty's revenue for the quarter was approximately $1.67 billion, falling short of the estimated $1.72 billion. This 2.65% miss from the Zacks Consensus Estimate also reflects a decrease from the $1.73 billion reported in the same period the previous year. The company has only surpassed consensus revenue estimates once in the last four quarters, indicating ongoing challenges in revenue generation.

The company has revised its annual profit forecast downward, now expecting an adjusted per-share profit between 50 and 52 cents, down from the previous forecast of 54 to 57 cents. This revision comes amid a decline in demand for cosmetics in the U.S. and stricter inventory management by retailers. Similar trends have been observed by competitors like Elf Beauty and L'Oreal, as highlighted by recent reports.

Despite these challenges, Coty achieved significant gross and operating margin expansion in the first half of fiscal year 2025. However, net revenue decreased by 1% year-over-year, influenced by foreign exchange rates and the divestiture of the Lacoste license. The company's like-for-like net revenue grew by 2%, driven by performance in prestige and mass fragrances, as well as mass skincare, although cosmetics and body care saw declines.

Coty Inc. (NYSE:COTY) Earnings Preview: Challenges Ahead

  • Coty Inc. (NYSE:COTY) faces potential challenges in its Q2 earnings report due to downturns in the Chinese mainland and Asia Travel Retail markets.
  • Analysts project a 20% decrease in earnings per share (EPS) and a slight 0.7% decrease in revenue compared to the same period last year.
  • Financial metrics such as a price-to-earnings (P/E) ratio of 34.83 and a debt-to-equity ratio of 1.01 will be key in assessing Coty's market valuation and financial health.

Coty Inc. (NYSE:COTY) is a global beauty company known for its wide range of cosmetics, skincare, and fragrance products. The company operates in a competitive market alongside major players like L'Oréal and Estée Lauder. Coty is set to release its quarterly earnings on February 10, 2025, with analysts estimating earnings per share (EPS) of $0.20 and revenue of $1.72 billion.

However, Coty's upcoming Q2 earnings report may reflect challenges due to a downturn in the Chinese mainland and Asia Travel Retail markets. These regions have shown weakness, which could negatively impact Coty's financial performance. Analysts expect a decline in earnings, with projections of $0.20 per share, a 20% decrease from the same period last year.

Revenue is anticipated to reach $1.72 billion, a slight 0.7% decrease from the previous year's quarter. Over the past 30 days, there has been a 0.6% downward revision in the consensus EPS estimate. Such revisions can influence investor reactions, as empirical studies show a strong correlation between earnings estimate trends and short-term stock price performance.

Coty's financial metrics provide insight into its market valuation. The company has a price-to-earnings (P/E) ratio of 34.83, indicating how the market values its earnings. The price-to-sales ratio is 0.97, showing investor willingness to pay per dollar of sales. The enterprise value to sales ratio is 1.61, reflecting total valuation relative to sales.

Coty's debt-to-equity ratio is 1.01, indicating the proportion of debt used to finance assets relative to equity. The current ratio is 0.85, suggesting its ability to cover short-term liabilities with short-term assets. These metrics, along with the earnings report, will be crucial in assessing Coty's financial health and future prospects.

Coty Lowers Full-Year Outlook Amid Mixed Q1 Results

Coty (NYSE:COTY) posted mixed first-quarter results and reduced its full-year earnings outlook.

For the quarter, Coty reported adjusted earnings per share of $0.15, missing the analyst consensus of $0.20. Revenue rose 2% year-over-year to $1.67 billion, narrowly missing the expected $1.68 billion.

Coty’s Prestige segment showed resilience, with revenue up 5% on a reported basis and 7% like-for-like. However, the Consumer Beauty segment faced challenges, with a 3% decline on a reported basis and flat performance on a like-for-like basis.

For fiscal 2025, Coty lowered its earnings per share guidance to $0.54-$0.57, down from its prior range of $0.56-$0.60, and anticipates adjusted EBITDA growth near the lower end of its previous 9-11% target. Despite these adjustments, Coty maintained its free cash flow growth forecast in the low to mid $400 million range and reaffirmed its goal to reduce leverage below 3x by the end of 2024.

Coty Earns an Upgrade at TD Cowen

TD Cowen analysts raised their rating on Coty (NYSE:COTY) from Market Perform to Outperform, increasing the price target from $13.00 to $16.00.

The analysts' optimism stems from a recent fireside chat with Coty's Chief Brands Officer of Consumer Beauty, Stefano Curti, and insights from Coty's presentation at CAGNY. The upgrade is based on several key factors: the strong momentum in the fragrance sector, with Coty's expertise in prestige fragrances (around 55% of sales) attracting new generations in varied ways; opportunities for diversification and premiumization across different geographies and product categories; the need for modernizing its Consumer Beauty segment, which represents 38% of fiscal 2023 sales and is recognized widely but requires updates in product offerings and marketing strategies; and Coty's ability to generate significant cash flow, reducing debt leverage.

Additionally, the analysts pointed out Coty's potential for margin expansion compared to peers, with current gross margins in the low 60% range versus competitors like L’Oréal and Estée Lauder in the low 70%. This potential is attributed to increased penetration in prestige products and Asia, along with ongoing cost-saving measures.

Coty Earns an Upgrade at TD Cowen

TD Cowen analysts raised their rating on Coty (NYSE:COTY) from Market Perform to Outperform, increasing the price target from $13.00 to $16.00.

The analysts' optimism stems from a recent fireside chat with Coty's Chief Brands Officer of Consumer Beauty, Stefano Curti, and insights from Coty's presentation at CAGNY. The upgrade is based on several key factors: the strong momentum in the fragrance sector, with Coty's expertise in prestige fragrances (around 55% of sales) attracting new generations in varied ways; opportunities for diversification and premiumization across different geographies and product categories; the need for modernizing its Consumer Beauty segment, which represents 38% of fiscal 2023 sales and is recognized widely but requires updates in product offerings and marketing strategies; and Coty's ability to generate significant cash flow, reducing debt leverage.

Additionally, the analysts pointed out Coty's potential for margin expansion compared to peers, with current gross margins in the low 60% range versus competitors like L’Oréal and Estée Lauder in the low 70%. This potential is attributed to increased penetration in prestige products and Asia, along with ongoing cost-saving measures.

Coty Reports Better Than Expected Q3 Results

Coty (NYSE:COTY) reported its Q3 earnings results on Tuesday, with EPS of $0.19, coming in better than the Street estimate of $0.03. Revenue was $1.29 billion, beating the Street estimate of $1.23 billion.

This led to an increase in guidance, but it reflects a more modest Q4, largely due to inventory re-stocking actions in Q3 that led to a one-time mid-single-digit benefit to growth. Demand remains healthy around the globe with incremental upside from China as the country reopens and the company invests in new skincare launches in the region.

For the full 2023 year, the company expects EPS to be in the range of $0.38-$0.39, compared to the Street estimate of $0.37.