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Coty (COTY) Q3 Earnings Match Estimates, Revenues Decline Y/Y

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Coty Inc. COTY released third-quarter fiscal 2021 results, wherein the bottom line increased year over year and came in line with the Zacks Consensus Estimate. While the top line declined year over year, trends improved sequentially despite the pandemic-induced lockdowns in key markets, especially Western Europe.

The company noted that sales in the prestige channel reverted to growth, as the effects of coronavirus decreased in a number of markets. The company saw strength in several core markets like China and the United States. Though sales in Europe have been under pressure, lifting of curbs is likely to aid improvement in the region, which is one of the key regions. The company also continued to gain from strong e-commerce operations.

Apart from these, Coty remained focused on curtailing the cost structure in the third quarter, with savings amounting to nearly $110 million. Year to date, its cost savings amounted to more than $270 million. Well, the company is on track to achieve its savings target of about $300 million for fiscal 2021.

Quarter in Detail

Coty posted breakeven results for earnings in the third quarter of fiscal 2021, which was in line with the Zacks Consensus Estimate. Markedly, the bottom line fared better than the year-ago period’s adjusted loss of 14 cents per share.

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 net revenues came in at $1,027.8 million, which fell 3.3% year over year. The Zacks Consensus Estimate stood at $1,026 million. Currency translations had a 2.2% positive impact on the top line.

LFL net revenues slid 5.5% due to declines in the EMEA and Americas segments, somewhat compensated by growth in the Asia Pacific. Notably, the LFL mass business revenues saw a 14.5% decline and the prestige business was up 2.4%.

Adjusted gross margin increased from 57.7% to 62.2%, on the back of revenue mix management, supply-chain productivity and betterment in excess & obsolescence, somewhat negated by lower sales volumes.

Adjusted operating income came in at $95.6 million compared with adjusted loss of $68.2 million in the year-ago period. Further, adjusted EBITDA for the quarter came in at $183.2 million compared with a loss of $1.4 million in the year-ago period. The upside was a result of improved gross margin, constant fixed-cost curtailments (including people and non-people expenses) and solid marketing expense management.

Channel-Wise Details

Prestige: Net revenues in the segment advanced 6.5% to $600.6 million, while LFL revenues rose 2.4%. The upside was mainly backed by growth in the United States and China. Brand-wise, the company benefited from double-digit increases in Gucci, Burberry, Marc Jacobs and philosophy. Impressively, e-commerce sales rose more than 20% year over year.

Mass: Net revenues fell 14.3% year over year to $427.4 million, while LFL sales fell 14.5%. Sales continued to bear the brunt of reduced demand for color cosmetics due to lesser usage occasions amid the pandemic-induced social distancing and lockdowns.

Nonetheless, the company noted that sell-out trends have begun improving lately. E-commerce sales remained strong, growing more than 50%. E-commerce sales were backed by continued growth at retailer sites as well as robust performance on Amazon AMZN.

Segment Results

Net revenues in the Americas fell 6% to $409.6 million. LFL revenues were down 3.4% as weakness in the color cosmetics market continued to hurt the mass beauty category. Notably, U.S. prestige sales, excluding travel retail, saw robust growth, thanks to strength in fragrances, skincare and cosmetics.

During the quarter, e-commerce sales surged more than 50% in the region, thanks to strength in prestige as well as mass categories. This, in turn, was powered by solid execution at e-retailers as well as brick & click. As a percentage of sales, e-commerce penetration was in low-double digits for the year-to-date period.

Sales in EMEA dropped 7.8% (down 12.9% at LFL) year over year to $473 million. LFL sales were hurt by travel retail hurdles. Apart from these, sales trends in both mass and prestige were hurt by pandemic-led curbs and lockdowns in huge parts of Western Europe. E-commerce sales soared about 90% in the quarter and e-commerce penetration, as a percentage of sales, went up to the high-teens percentage range.

Sales in the Asia-Pacific region rose 27.7% (19.5% at LFL) year on year to $145.2 million, with most of LFL revenues declining due to strength in prestige brands, even amid travel retail hurdles stemming from reduced air travel. The company saw strength, particularly in China. E-commerce sales jumped in triple digits, with penetration in the mid-teens range.

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $315.3 million and immediate liquidity of $2,376.8 million.

The company’s financial net debt of $5,106.6 million as of Mar 31, 2021, escalated from $4,842.6 million as of the end of the preceding quarter (Dec 31, 2020). During the quarter, Coty used cash in operations of $186.3 million. Operating cash flow for the year-to-date period came in at $286.4 million. Free cash outflow during the third quarter was $218.4 million.

Key Things to Note

On Mar 3, 2021, Coty penned a letter of intent to team up with LanzaTech. This partnership is aimed at introducing sustainable ethanol produced from captured-carbon emissions into the company’s fragrance offerings.

On April 23, the company revealed its long-term strategy, which was highlighted by six priorities aimed at sustainable growth. These include stabilizing Consumer Beauty make-up brands and mass fragrances; accelerating luxury fragrances and setting up Coty as a core player in prestige make-up; establishing a skincare portfolio in prestige and mass channels; strengthening e-commerce and Direct-to-Consumer (DTC) capabilities; growing presence in China via Prestige and certain Consumer Beauty brands; and setting Coty as an industry leader in sustainability.

Shares of the Zacks Rank #3 (Hold) company have rallied 48.7% in the past three months compared with the industry’s growth of 5.8%.

2 Solid Consumer Staple Stocks

Medifast MED, which currently carries a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 12.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

United Natural UNFI has a Zacks Rank #2 (Buy) and its bottom line outpaced the Zacks Consensus Estimate by 13.6% in the trailing four quarters, on average.

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