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Coty (COTY) Up More Than 20% on Q1 Earnings & Sales Beat

Zacks Equity Research
·6 min read

Shares of Coty Inc. COTY surged as much as 22.2% on Nov 6 following its first-quarter fiscal 2021 results, wherein both top and bottom lines came ahead of the Zacks Consensus Estimate. Results benefited from improving sales trends in all channels and geographical regions, courtesy of robust e-commerce momentum and gains from innovative product launches. Also, focus on cost reductions aided the company’s performance.
 
Notably, it delivered fixed cost savings of nearly $80 million in the first quarter and is on track to generate savings of more than $200 million in fiscal 2021. Additionally, management intends to remain committed to undertaking marketing investments.

Quarter in Detail

Results from continuing operations reflect the total company results, excluding revenues and costs that are directly associated with the Wella business, whose divestiture is expected to be concluded by the end of calendar year 2020. Ongoing Coty results reflect the performance from continuing operations, together with some cost recoveries anticipated under the Wella transitional service agreement (or Wella TSA).

Coty Inc. Price, Consensus and EPS Surprise

Coty Inc. Price, Consensus and EPS Surprise
Coty Inc. Price, Consensus and EPS Surprise

Coty Inc. price-consensus-eps-surprise-chart | Coty Inc. Quote

Coty’s adjusted earnings per share came in at 11 cents, which grew 57.1% from 7 cents reported in the year-ago period. Adjusted loss from continuing operations was 2 cents per share compared with a loss of 1 cent recorded in the prior-year period. The Zacks Consensus Estimate for the quarter under review was pegged at a loss of 7 cents.    

Total revenues declined 13% to $1,690.5 million, while like-for-like (LFL) revenues dropped 11.8%. Coty’s net revenues from continuing operations came in at $1,124.1 million, which decreased 20.3% year over year. Nonetheless, the top line came ahead of the Zacks Consensus Estimate of $1,103 million. Currency translations had a negligible impact on the top line.

LFL net revenues from continuing operations tanked 18.9%. LFL revenues were down in all regions and channels. Notably, LFL mass business revenues saw a 10.1% decline and the prestige business was down 25%, indicating sharp improvements from respective decreases of 48% and 73% in the preceding quarter. The solid sequential improvement can be attributable to re-opened stores and better industry trends.

Adjusted gross margin from continuing operations declined from 60.2% to 58.6%, thanks to reduced volumes and adverse mix impact.

Adjusted operating income from continuing operations came in at $81.1     million, up 24% year over year on the back of robust fixed cost curtailments (including people and non-people expenses) along with solid marketing expense management. Adjusted operating margin for continuing operations expanded 260 basis points to 7.2%.

Channel-Wise Details (From Continuing Operations)

Prestige: Net revenues in the segment fell 20.2% to $644.1 million, while LFL revenues declined 25%. Reported sales benefited from the addition of Kylie Beauty sales in the quarter under review. Though sales improved quarter-over-quarter across all regions, it continued to decrease year over year due to major weakness in core travel retail and consumer traffic still being below pre-pandemic levels. Nevertheless, e-commerce sales continued to be strong.

Mass: Net revenues declined 20.6% year over year to $479.8 million, while LFL sales fell 10.1%. Reported revenues were hurt by the absence of Younique’s revenues, which were included in the prior-year quarter. While sales improved from the previous quarter, mask-wearing and social-distancing trends continued to put pressure on demand for color cosmetics. On the brighter side, e-commerce sales remained strong and continued seeing a solid performance on Amazon AMZN.

Segment Results (From Continuing Operations)

Net revenues in the Americas slipped 3.7% to $470.6 million. LFL revenues were down 4.5%, much better than the 51.5% slump witnessed in the preceding quarter. Improved trends in the quarter were backed by gainful innovation, sustained e-commerce strength and better consumption (driven by pent up demand as lockdowns were relaxed). Notably, e-commerce penetration, as a percentage of sales, doubled year over year.

Sales in EMEA dropped 21.6% (down 24.4% at LFL) year over year to $530.4 million. Although trends improved sequentially, it was still weak because of overall trends across prestige fragrances and mass cosmetics. Moreover, persistence of considerable weakness in travel retail was a deterrent. E-commerce penetration, as a percentage of sales, saw robust growth in the quarter.

Sales in the Asia-Pacific region declined 35.3% (down 36.6% at LFL) year on year to $123.1 million, with most of the decline being accountable to the travel retail softness and continued active sales reduction to channels with low value (especially in prestige business).

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $535.7 million. Financial net debt of $7,864.5 million as of Sep 30, 2020, was almost in line with the balance on Jun 30. The divestiture of Wella, together with positive free cash flow (expected in the second quarter), is likely to help Coty lower its net debt to roughly $5 billion.  

The company had immediate liquidity of $1,721.7 million as of Sep 30 (including cash and cash equivalents as well as unused revolving credit facility). During the quarter, Coty generated net cash from operating activities of $42.6 million. Free cash outflow during the same time frame was $28.3 million.

Key Things to Note

On Oct 7, 2020, Coty unveiled the launch of direct-to-consumer flagship websites for Kylie Skin across the United Kingdom, Australia, Germany and France.

Despite the pandemic-related challenges, the company made considerable progress on its core priorities, which include innovation and performance in its prestige and mass channels, solidified position in its key markets, robust e-commerce momentum and strengthened foothold in the skincare category and the China region. Toward this end, the recent launches of Marc Jacobs Perfect, Gucci's Bloom Profumo di Fiori, Sally Hansen's good.kind.pure, and CoverGirl's Clean Fresh have been yielding results. Further, the company’s solid digital efforts helped its e-commerce penetration, as a percentage of overall sales, double to 13%.  

Shares of the Zacks Rank #3 (Hold) company have lost 3.8% in the past three months compared with the industry’s decline of 13.8%.

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