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Coty (COTY) Q2 Earnings Beat Estimates, Revenues Down Y/Y

Zacks Equity Research

Coty Inc. COTY released second-quarter fiscal 2019 results, with earnings and sales surpassing the Zacks Consensus Estimate. Performance in the period gained from growth in the Luxury segment. These upsides seemed to fuel investors’ sentiments, as the stock gained nearly 22% in the pre-market trading session on Feb 8.

However, the top and the bottom-line declined year on year in the reported quarter due to weakness in the Consumer and Professional Beauty channels. Supply chain disruptions were a drag on these units.

Let’s delve deeper into Coty’s quarterly outcome.

Quarter in Detail

Adjusted earnings of 24 cents per share surpassed the Zacks Consensus Estimate of 22 cents. However, the bottom line declined 25% year over year.

Coty generated revenues of $2,511.2 million, which came ahead of the Zacks Consensus Estimate of $2,472 million. However, the top line fell 4.8% year over year. We note that the Consumer and Professional Beauty segments performed dismally during the quarter. Nevertheless, organic (LFL basis) revenues inched up 0.7%.

Coty Inc. Price, Consensus and EPS Surprise

 

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

Adjusted gross margin increased 50 basis points (bps) to 62.1% in the quarter under review, driven by revenue mix shifts, gains from Professional Beauty gross margin and favorable foreign exchange impacts.

Additionally, adjusted operating income fell 7% to $322.3 million, mainly due to soft revenues along with currency headwinds. This was partly compensated by lower fixed costs. Further, adjusted operating margin came in at 12.8%, contracting almost 40 bps from the year-ago quarter.

Segmental Details

Luxury: Net revenues in the segment rose 7% to $1,017.5 million, while LFL revenues improved 10.8% driven by the inclusion of Burberry and growth in core portfolio amid disruptions in the supply chain. Further, the category witnessed growth in brands like Gucci, Tiffany TIF, Chloe and Calvin Klein brands. Adjusted operating income in the category came in at $176.9 million, up 41% on the back of revenue growth and fixed cost reductions.

Consumer Beauty: Consumer Beauty revenues fell 15% to $967.8 million, while LFL sales declined 7.3%. Results were hurt by supply-chain disruptions including customer penalties and increased promotions. Also, persistent softness in mass beauty categories in the United States and Europe dented results. Also, performance of Younique was dismal during the quarter. Adjusted operating income came in at $54.1 million, down about 59% from the prior-year quarter’s tally.

Professional Beauty: Net revenues in the segment amounted to $525.9 million, down 4% year over year and 0.8% on LFL basis. The unit’s performance was hurt by disruptions at Coty’s North American warehouse. Adjusted operating income in the category were $91.1 million reflecting a rise of 1%.

Regional Results

On a regional basis, net revenues in North America were flat (up 2% LFL basis) year on year and totaled $742.2 million. The segment’s performance gained from growth in the Luxury category, while softness in Consumer Beauty and Professional Beauty were deterrents.

Sales in Europe tanked 7% (down 4% LFL) to reach $1,201.6 million, as improvements in Luxury were countered by weakness in Consumer Beauty. Sales in the ALMEA region declined 5% to $567.4 million. Nevertheless, sales in the region improved 2% on LFL basis, courtesy of solid momentum in Luxury and Professional Beauty.

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $417.5 million and net long-term debt of $7,560.9 million.

During the second quarter, the company generated $319.6 million as net cash from operating activities and free cash flow of $193.9 million.

In a separate press release, the company announced dividend of 12.5 cents a share, payable on Mar 15 to shareholders of record as on Feb 28.



Outlook

Management is on track with efforts to bring the company back on growth trajectory, although the same is likely to take some time. In this respect, the company is focusing on improving the Consumer Beauty unit, which has long been dismal. Further, this Zacks Rank #3 (Hold) company plans to undertake initiatives to keep boosting gross margin. This entails optimizing costs and simplifying operational and portfolio structures. Further, management highlighted that it will soon come up with a strategic plan to define the medium-term agenda

Additionally, the company expects adjusted operating income (on constant currency basis) in fiscal 2019 to be below fiscal 2018 level. The company anticipates positive free cash flow for fiscal 2019.

Price Performance

Coty’s shares declined 13.7% in the past three months compared with the industry’s rise of 4.4%.

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