Q1 2024 Coty Inc Earnings Call

Participants

Laurent Mercier; CFO; Coty Inc.

Sue Y. Nabi; CEO & Director; Coty Inc.

Andrea Faria Teixeira; MD; JPMorgan Chase & Co, Research Division

Anna Jeanne Lizzul; Research Analyst; BofA Securities, Research Division

Charles-Louis Scotti; Head of Luxury Goods; Kepler Cheuvreux, Research Division

Christopher Michael Carey; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Filippo Falorni; VP; Citigroup Inc., Research Division

Korinne N. Wolfmeyer; VP & Senior Research Analyst; Piper Sandler & Co., Research Division

Oliver Chen; MD & Senior Equity Research Analyst; TD Cowen, Research Division

Olivia Tong Cheang; MD & Research Analyst; Raymond James & Associates, Inc., Research Division

Robert Edward Ottenstein; Senior MD and Head of Global Beverages & Household Products Research; Evercore ISI Institutional Equities, Research Division

Sunil Harshad Modi; MD of Tobacco, Household Products and Beverages & Lead Consumer Staples Analyst; RBC Capital Markets, Research Division

Sydney A. Wagner; Equity Associate; Jefferies LLC, Research Division

Presentation

Operator

Good morning and good afternoon, everyone. My name is Todd, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's First Quarter Fiscal 2024 Question-and-Answer Conference Call.
As a reminder, this conference call is being recorded today, November 8, 2023 at 7:30 a.m. Eastern Time or 1:30 p.m. Central European Time. Please note that on November 7 at approximately 4:30 p.m. Eastern Time or 10:30 p.m. Central European Time, Coty issued a press release and prepared remarks webcast, which can be found on its Investor Relations website. 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 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.
With that, we will now open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question will come from Nik Modi with RBC Capital Markets.

Sunil Harshad Modi

I actually had a bigger picture question. Sue, when we recently met in person a few weeks ago, you were very excited about the innovation program at Coty. And I wanted to ask a more broader question about skin care, and how you think about skin care holistically, in a sense that topicals is one thing, but what about ingestibles and injectables? I'm just curious on philosophically how you think about the category going forward.

Sue Y. Nabi

Okay. Nik, thank you for your question. Indeed, that's, as you say, the bigger and the broader picture. I think what we have shared with all you guys several times is that the skin care market, and by the way, the beauty market in generally speaking, is going in the direction of the medicated beauty. And this is something that we see very, very strongly. And that's the reason why we have decided to reposition some of our brands quite strongly on this area. If you allow me, may I remind everyone that we just did the launch behind Orveda Skin Care of the first serum that uses technologies, inspired by the medical world that we call [senolytics], which is the first time a skin care brand is using this kind of technologies in a topical cream, as you say it.
On Lancaster, the story that is really resonating very well is the story of using this vectors, liposomes that penetrate deep inside the skin. And this is really what is making the brand resonate with the Chinese consumers. And also on philosophy in the U.S., we've decided that the brand will stand for the brand that's going to bring a bit of wisdom in the craze around dermatologic ingredients.
So as you hear from my words, it's all about a kind of medicated beauty. In the beauty world, we are using ingredients and formulations that are acting on the upper layer of the skin, and we are not allowed to go lower. So if you think about injectables, you clearly see this booming with other companies selling products that are going to [revive] the muscles without quoting any brand, products that are all about injecting [hyaluronic] acid inside the skin, vitamins or sometimes medical devices allowing a faster penetration of the active. So you're right. This is the direction that the overall market is going into, but we have some limitations when it comes to selling skin care from a beauty brand that does not require any kind of long time testing, like a medication or a drug would require. But that's more or less the direction we are seeing.
Ingestibles. I mean ingestibles is like male skin care. It has been a kind of -- everyone says this is the year of ingestibles, and the year after, nothing has happened. So again, there, my gut feeling is that this category needs a bit of strong R&D because a lot of people believe that what you are going to ingest is going to be digested by your stomach enzymes. And at the end of the day, what's the difference between eating good food and having ingestible. So that's also something we hear from consumers, that ingestibles need to demonstrate their ability to bring to the right place, the right ingredients, knowing that they come into your digestive system.
So that's the whole -- the big picture I could share with you. I hope I'm answering part of your question.

Operator

Our next question will come from Oliver Chen with TD Cowen.

Oliver Chen

Sue and Laurent, you made a lot of great progress with your digital marketing, and the studio we toured was remarkable. What's ahead in terms of how you're thinking about a digital center of excellence, and key principles and platform occasion as you'll continue to build this capability across your portfolio? Also, as we look forward, what are your thoughts on pricing in the environment? We're seeing a lot of cross currents in the consumer in many regions. However, you've been on a really good pace with all the fragrance momentum.

Sue Y. Nabi

Oliver, thank you for your question. So again, on the digital centers of excellence, you're totally right. We started, since 2020, to really create a center of excellence that's based in Paris. That's the global center of excellence, really in a kind of catch-up sales because the company was a bit behind its competitors in this area 3 years ago. And this, we made it happen in Paris. And now it's exactly the right time to have these centers of excellence, benefiting from the global know-how, being created in key regions around the world, namely the U.S. or China to take 2 examples where the digitalization of the beauty world is quite advanced and fast paced. So this is exactly where we are standing now.
On Consumer Beauty, you know that we are also accelerating in our ability to create locally in the different countries because this can only be local because you need to fit with the culture, you need to fit with the language, you need to fit with a local trend. So we are creating studios, let's call them like this, in the U.S., in U.K. and elsewhere. I think we created something like 15 studios, which are TikTok or YouTube, call them the way you want, studios, where we are creating together or co-creating with influencers' content. And we are also beating the machine. Just to give you an idea, until recently, we were working with a few dozens of influencers behind the key launches of the Consumer Beauty makeup brands.
And then recently, we moved to hundreds, and we saw the results immediately, if I take the example of U.K., where we moved from nowhere in terms of EMV and VIT to top 5, top 6 brands, sometimes ahead of best-in-class brands that have been doing this for years and years. And now the objective is to multiply this number by 3 to get above the threshold of the 1,000 influencers reached by our brands.
So this is exactly what's happening in terms of centers of excellence, first built globally in Paris, and now going into different countries, in New York, in London, and in Shanghai, where we are today talking to you from.
Laurent, maybe you can take the second part, on the price?

Laurent Mercier

Yes, absolutely, on pricing. So indeed, I mean, first of all, just to remind that indeed, we implemented, I mean, several price increase over the last 2 years at a level of mid-single digit. And this price increase, I mean, went very smoothly, and we are very successful. The clear demonstration is what you are seeing is that our volumes keep growing. And definitely, that you are seeing that in Q1, our volumes are growing. So this was really very important in our strategy to make sure that there is no elasticity on volumes. And this is -- and this was the case.
So now looking ahead, of course, we are very conscious that the reason, especially on COGS inflation is starting to softening. So what -- definitely, we are really focusing on mix management. This is definitely the #1 driver to continue to improve our gross margin. And mix management, you are seeing some concrete example, the innovations that we are launching. All of these innovations are really mix accretive, so are really driving the average price up.
Number two, we are opening, and we shared also last time, big stream of SRM, which is strategic revenue management. And it's really an approach where now we have a dedicated teams. It's really to open the value analysis of all the product and really making sure where we can extract some value. So concretely, it's really to review in depth all the promotion policy, the trade terms. In some cases, it can be also about the format. And again, this is really a way for us to improve the average unit price.
And last but not least, we will continue, definitely, to implement some very targeted price increase. I would say, more at a level of low single digit, but definitely, we have this pricing team, pricing office, very expert. And really, we are very granular, and I repeat it every time. So we will continue in a very, very targeted manner.

Oliver Chen

The innovation sounds quite exciting. Best regards.

Laurent Mercier

So innovation, of course, is part of the game. So it's definitely part of the mix management. And of course, we are making sure, again, and you have a very concrete example in this Q1, that high quality of the innovations. Also, as you know, there is a shift to higher concentration on Prestige Fragrance mostly, and this is again a way for us to drive the average unit price. So absolutely.

Sue Y. Nabi

And on Consumer Beauty, Oliver, you have also the same thing. What is really driving the market is premium innovation, not entry pricing, and that's very important for everyone to hear. And this is the area where we are going to accelerate the pace of innovation. It used to be high single-digit levels required in terms of innovation, and we are more today targeting high high-teens level of innovation in terms of percentage of the net revenues. It's accelerating, but premium innovation is driving the market.

Operator

Our next question will come from Rob Ottenstein with Evercore.

Robert Edward Ottenstein

Great. Congratulations on the continued great work. So given that you were in China, I'd be remiss to not ask you what you're seeing on the ground in China and in Hainan, if you're there, both in terms of how the consumer is and the beauty market is recovering, if it is recovering? And then maybe, additional details on your execution, what's going particularly well?

Sue Y. Nabi

Robert, thank you very much for your kind words. So again, you're right, we are in Shanghai. We've been here since a few days, and we'll be here until the end of the week. And indeed, it's very interesting to see how the market is evolving quite fast, I have to say, specifically on the fragrance category. Again, we shared with you that a few years -- months ago, maybe a year ago, we shared with you that we start to see Chinese getting very, very interested in this category. And this is accelerating at an incredible pace, even the tastes are accelerating.
To give you a few ideas, we launched Burberry Goddess in this country, a little bit after the rest of the countries, because we thought that the scent of this innovation was really a bold scent, et cetera. And the reception has been outstanding. The line is already, #6 line at Sephora, which is a ranking that we never achieved in this country with any of our fragrances.
So it's really this fragrance category that's, by the way, growing, and it's growing by 6%. And Coty in the country, this is Beauty Research latest results. It's growing more than 2x faster than this level of the market. And Burberry Goddess is just starting in this country, and we believe it's going to be a game changer. The other element we are seeing is the premiumization of the market. And I would even say, the bigger part of niche fragrances, these fragrances represent almost 1/4 of the market today in China. This is 2.5x bigger than what you see in the rest of the world.
So this premiumization, going in the direction of more niche brands, really selling in freestanding stores, and when you enter the boutique, you don't have the impression you are in a store that is selling fragrances. You have the impression that you are visiting a concept store or sometimes a museum. So this is something that is going very, very quickly, and that's the reason why I've been sharing with you how much we are eager to develop this kind of expertise inside the company to understand, of course, how to create winning niche brands, but also to understand the world of retail when you are operating a freestanding store.
We also did the CIIE inauguration 2 days ago. It was a fantastic moment, especially for [Infiniment] Coty Paris, that was not fully disclosed to the Chinese audience. We did a teaser, and what was incredible is to see all these young men and young women entering this booth, where they had a giant flowers that they can put their nose in and smell the fragrances and try to guess the name of the fragrance, how will the bottle look like, et cetera. And the way they welcome this was absolutely outstanding. So we're very, very confident about this line that is going to meet the Chinese consumers.
The other market that's doing very well in China today is makeup. Makeup is growing by 10%. And there, we are growing faster than the makeup market, mainly thanks to Gucci makeup and Burberry makeup. There, it's all about face makeup because, again, the makeup category is skinifying and anything that's a good mix between pigments and skin benefits is clearly what people are looking for on top of the fact that everything has to be long wear.
Last but not least, skin care market, which is the immense majority of the sales. This market is slightly negative in the recent -- most recent period. I think it's not that Chinese are using less skin care. They are probably shifting from some brands to other brands, maybe the level of promotionality that this market reached in the last quarters and years is a kind of maximum. And then there is a kind of -- they are looking for what are the new brands that can speak to their needs without being too promotional, without being too much into this world, or where you buy only if there is a promotion.
And there, our brands are doing well, specifically Lancaster, which is the main brand that we have in this country, specifically online, the brand is continuing to see momentum because it's growing month after month. We have started, as you remember, with Ligne Princière. And now we are adding next to Ligne Princière, a focus on sun care because this brand is really seen as the epitome of what is high-end sun care protection is. And we are also adding new innovations that are about to land in the market in January 2024. So that's a bit long, but that's what we saw since a week now in Shanghai.
Hainan. We did not go there. I have to say, not this time, but our progression of the day, you've heard it, and you've seen it during the script and the earnings release, is very, very strong, in fact, specifically behind Lancaster, but also behind brands like [Chloé].

Operator

Our next question will come from Filippo Falorni with Citi.

Filippo Falorni

So clearly, a very strong start of the fiscal year with 18% like-for-like sales growth. So maybe, Sue, can you comment on like what drove the upside relative to the guidance you provided in September? You mentioned a lot of drivers in your prepared remarks, but maybe, you can rank them in terms of category growth, innovation contribution. And then thinking ahead of your guidance for the first half, it does imply a bit of a slowdown in fiscal Q2 to 4% to 8% like-for-like sales growth. So maybe what is the driver? Was there any pull forward of shipments in Q1 versus Q2? Any color there would be helpful.

Sue Y. Nabi

Good morning, Filippo. So in fact, what drove this upgrade of the guidance during the quarter is the fact that the -- number one, the market continues to be very, very strong, 10% of growth of the fragrance market. This is really a fantastic figure on top of 10% in Q1 fiscal '23. So again, when we discussed it several times since the beginning of this fragrance index phenomenon, we really tried to explain as much as we could, that this is everything, but something that's a onetime event and everything has to do with a very profound shift in terms of who are the people who are buying, what they are buying, how they are premiumizing, and they are -- and how social media, in a way, is holding this consumption globally in the different regions around the world.
So the market continues to be very good, very strong and very dynamic. And the best way to see it is also in the performance of the company. So on the market that was 10%, Coty fragrances, Prestige fragrances grew by 25%, so 2.5x the growth of the market. Of course, there is a lot of pipeline of new innovations, but these innovations, they are all delivering very strongly, yes. Of course, there is everything we told you about Burberry Goddess that has become a top 6 fragrance in the U.S. I said it recently top 6 in Sephora in China. In many markets, it's inside the top 10. And this is for sure the #1 innovation in all the key markets around the world.
But it's not the only one. In fact, you have to know that we don't have 1 brand growing in the high 20s, not 2, not 3, not 4, we have 7 brands, in fact, that are growing in the high 20s. Some of them with innovation and some of them without innovation. So this is also -- I'm sorry to say it, but -- not sorry, I'm proud to say it, this is the good work we are doing at Coty, at creating incredible, exciting, the highly performing innovations in this area of the fragrance -- fragrance growth.
So that's what it really explains the upgrade of the guidance. We knew that Goddess would be big, but the jury was debating, is it going to be big, very big or extraordinarily big? So this is what we are seeing is that this is going to be quite big if I have to say.
So second element is the question around how Q2 will land. So you have to know that Q1 is typically a pipe in the quarter, where we pipe the Burberry Goddess, we've been piping also Gucci Magnolia innovation and also Boss Elixir innovation. Q2 is really a quarter of sell-out, as you know it. And the picture that is implied means that we are going to continue to have a very good performance, probably in line with the market or slightly above the market. So that's more or less what we believe is going to be. Hopefully, we have a good surprise. But so far, it does not mean there is a deceleration. It just means that we are all about sell-out versus sell-in plus sell-out in the first quarter.

Operator

Our next question will come from Korinne Wolfmeyer with Piper Sandler.

Korinne N. Wolfmeyer

Congrats on the quarter. So I'd like to piggyback off of the China, Hainan question. I'd like to better understand what are you seeing with sell-in versus sell-out for both China and Asia travel retail? And if it's not normalized yet, when do you think that should normalize? Also, any early reads from 11/11 presales? And then lastly, I'd like to see if there's any commentary you can share on any potential pressure with some of the Middle East tensions that we're seeing?

Sue Y. Nabi

So when it comes to Hainan, today, our inventory levels are okay. There is not any kind of flag to be done in terms of having inventories going up. Of course, we are in front of an easy comparative, if I may say, but still the growth of the fragrance business we are having there and our skin care also business is very high. It's a triple-digit growth. So that's quite -- that's good in a way.
When it comes to China inventory levels, they are healthy also on the Prestige side. The only part where we -- that we flagged, by the way, during the script and the earnings, even if this is very, very small portion of our business, is around CB. It's not to do with our -- with the market or anything like this. This has to do with moving from one line to another line at retailers. We revamped the Adidas [shower gel] lines. So -- and we changed it from one factory to another. So we had to build a bit of stock that was pushed to the trade. And then because of the slowdown of the market, this trend went up, and this delayed the arrival of the renovation of the [shower gels].
So this is the only thing we've flagged in all the communications we have done regarding an increase of inventory. But again, this is a very, very small part of our business given that Coty China business is, what, 90% Prestige and 10% CB more or less. So this is number one.
What do we see on 11/11? The dynamics of the fragrance category is confirmed. This is really something that is confirming month after month, specifically, as I said it before, on the high-end part. And more than ever, people exploring scents or juices that are unexpected for a market like China, which is a great, great, I would say, news because this means that the ability to create full lines for the Chinese consumers, it's crystallizing now, versus what used to be the case just 2 or 3 years ago, which means that you could launch only 2 or 3 flower iterations and you are done with the Chinese market. So there, there is the diversity that you see everywhere else around the world in terms of taste, taste that's starting in the country.
And on the last part of your question, regarding what is happening in the Middle East. This business is a mid-single-digit business at Coty. So far, we are not seeing any negative impact on our business. But that's the situation. But honestly, I have to say that on a personal level, as you know it, I'm very saddened by the violence, and we continue to hope for the peace and then end of the suffering. That was an important point to make after your question.

Operator

Our next question will come from Anna Lizzul with Bank of America.

Anna Jeanne Lizzul

I wanted to ask on the quarter, you had a good deal of operational leverage to help drive the adjusted EBITDA. And I was wondering if you could elaborate on the drivers of this and how you see it progressing through the year?

Laurent Mercier

Yes. Absolutely. Indeed, I mean, we continue definitely -- our strategy is really making sure this flywheel, definitely top line growth, focus on productivity and then making sure that we are allocating resources to support our strategic initiatives, and we keep growing our EBITDA. So this is definitely what the equation you saw in Q1, and indeed is driving us to deliver an EBITDA, which is higher than expectations.
So now when looking ahead, what are the components? Number one, of course, we continue this top line agenda. So this is, as you saw, we are raising the top line guidance. Number two, gross margin. Definitely, we are seeing -- I mean, Q2, where our gross margin should be flattish. And then expansion -- gross margin expansion in our H2, which will be the combination of the mix management, as I just shared. Productivity, that we continue targeted pricing. And also we are starting to see some softening on cost of goods inflation and also transportation inflation.
So then we will continue, of course, to inject some of this gross margin expansion into the strategic initiatives, the innovation, investment in the capabilities, as we say about digital, also but R&D, and definitely keeping improving our EBITDA margin as we confirm our EBITDA margin full year growing from 10 to 30 basis points. So the flywheel is fully in motion. And of course, with still high discipline on the cost and really making sure that it's fully, fully consistent with the strategic imperatives.

Operator

Our next question will come from Olivia Tong with Raymond James.

Olivia Tong Cheang

My first question is around your view on margin contribution by segment this year, and whether you think 1 division is expected to show more extension than the other? Are you expecting both divisions to grow margins in light of Q1 trends, Prestige margin, obviously increasing, but Consumer Beauty is still down on a year-over-year basis? And then just broadly in terms of your plans to raise price another round in early calendar '24. If you could just talk about elasticity and your view on the volume trajectory for this year as you implement that next round of pricing.

Laurent Mercier

Yes. Thank you, Olivia. So just to give you a few elements, as you shared indeed. So I mean, Prestige is showing strong, strong improvement on profitability. And CB starting at a lower pace. What's riding this is that we have -- in the 10% top line growth, Consumer Beauty, we have strong performance on Body Care, which is weighing down the gross margin. So again, it's very positive and absolute value. But definitely, there is some impact on gross margin.
But at the same time, I can tell you that there is a very strong work and huge work to improve the gross margin in Consumer Beauty. And when I was referring to Body Care, it's definitely Brazil is driving this growth, and we have significant gross margin expansion in this category in this market.
So definitely, you will see that gross margin in Consumer Beauty will improve quarter after quarter. And this is, again, with -- combined with the strong productivity plan that we are putting in place in Consumer Beauty, big one is being platforming. We are really making sure that now innovation that we are launching across the different brands, in fact, have the same technology, and it brings a significant savings. So it's going to contribute significantly in the coming quarters.
We keep working, as I shared before, on the strategic revenue management. So we have really a deep review -- detailed review on all the value analysis of Consumer Beauty, and we are really identifying significant value. So definitely strong focus, and there is a clear trajectory to improve our Consumer Beauty profitability, definitely in the coming quarters and in the coming years.
So then your second question was definitely on pricing. As I shared at the beginning, we have a strong pricing of it, working on the stream. So they are very precise, very granular, and it went very smoothly over the last quarters. So now we will do very targeted price increase. So when I'm saying very targeted price increase, that's exactly the answer to your question, it's really when we have all the elements, all the analysis that we do this, and it has no impact on the volume.
So what are the drivers, it's really when we know that it's about products, where there is high demand, there is high success. And definitely, we know that we can -- or there is a gap between channels or between competition, and definitely, we have room to increase price and, again, without impacting volumes. And we made very clear, and I repeat and you saw it in Q1, we are making sure that our growth is well balanced between volume, mix and price.

Operator

Our next question will come from Andrea Teixeira with JPMorgan.

Andrea Faria Teixeira

Good night there in China. So just on the -- I mean, again, congrats on the top line delivery. But on the Consumer Beauty, Laurent, you just mentioning some of the efforts. And we saw some improvement in market share. Should we expect some [velocity]? And so, I think you mentioned when we saw each other recently in terms of like how you're seeing the shelf space looking ahead in the spring resets, in particular in the U.S. and the U.K. So how should we be thinking as we see Consumer Beauty recovering there in the -- in particularly in those key countries? Will we see more like velocity? And then as retailers see that improvement, they would decide on shelf space into probably calendar '25.
And then on the investment side, if you can help us, like, of course, there's so much reinvestment that I think investors appreciate. The overhead in SG&A total dollars in the shorter month has been around $740 million per quarter. And then you obviously ramp up to around $800 million. Is that the way in the level of dollars that we should be working with?
And sorry, lastly, on the clarification on deciding to sell or to postpone the Wella sale. It seems that you have not reached an agreement on the pricing, I think, and I understand that. But just to think about how we should be thinking that becomes a put into KKR in calendar '25, and how that negotiation is a set valuation that you're looking to do? Or is that something that should be negotiated by the time we crossed that bridge.

Sue Y. Nabi

Andrea, I'm going to let Laurent answer on the 2 last questions, which have short answers, and then I'll take the question on CB, which is a little bit longer in terms of answer.

Laurent Mercier

Yes, absolutely. So indeed, on Well, yes, it's important I give you a full picture. So what are the elements? Number one is definitely that we are seeing a very strong cash flow trajectory in the first half fiscal '24 and the full fiscal '24. So definitely, this third element is giving us full confidence to reach our leverage ratio. Number two, as you know, we had -- we implemented our dual listing end of September, and we made an offering, which was very successful. And again, this is a second element, which is accelerating our deleveraging. So definitely.
And number three, just to be very clear, I mean the point is not about pricing. I mean, I can tell you, the due diligence, which was made on Wella fully confirm the great value of the company and the pricing. There was just -- I mean, if I make it some small misalignment on indeed on minority rights. And this thing happened. But again, based on the first 2 elements, we came to the decision that, okay, it was better to stop the transaction.
But be very clear that it doesn't change our agenda that we are targeting really the full divestiture of Wella by end of calendar '25. The value of Wella is absolutely confirmed, and you saw it in our books. And the relation with Wella is excellent, and the relation with KKR is excellent, and the Wella is a very good business.
So yes, well, your question on SG&A. I mean the key element is definitely that we are investing, but still growing our SG&A. So we are growing our SG&A below sales growth. But it is important also that you keep in mind that in SG&A, we are making sure that we are investing in our digital capabilities, we are investing in our R&D capability. So we are making sure so that within the SG&A, we have productivity on cost, where we don't see value for the business, but we are also investing on SG&A capabilities, which are creating value for the business. So that's the way we are driving also our SG&A question.

Sue Y. Nabi

So now on the Consumer Beauty question, regarding what's the trajectory of the division in terms of growth. Two things. The first one is that we are diversifying our sources of growth in Consumer Beauty. The majority of our sales are coming today from color cosmetics, and I will say a few words about this in a few minutes. But we are also building the machine to make Consumer Beauty a maker of mass fragrances. Here in China, we just had a meeting, and what we see is that there is potential all around the world.
In every country, people are craving for fragrances from the lowest price possible to the highest price possible. So this is an area that is very important for the division. It's to diversify the sources of growth and to diversify ideally in categories that are highly relative, and fragrances are highly relative to the gross margin of the Consumer Beauty division. Makeup is quite high also in the 60s, if not higher.
And this area, what we are doing, as I said this several times, is that we are accelerating the pace of innovation, specifically what I call premiumized innovation. So you've seen recently some innovation coming under CoverGirl, now platform, quite instantly, I have to say, because this is coming 6 months after, 8 months after now under email, we are platforming this premiumized innovations. And this is going to help us a lot to drive the -- of course, the profitability higher, but also to attract this younger generation.
So what we have done so far, if I take the example of CoverGirl, is that we have solidified the foundation of the company -- of the brand, sorry, towards, I would say, millennials and Gen X and Boomers. This is something that is not seen in other indie brands. They have mainly a Gen Z business. The one we have is big. And now we are going to build on top of this a more younger Gen Z, mainly digital influencer and advocacy driven business behind this innovation.
So the things I can share with you and which will take me to the shelf space is that CoverGirl is closing the gap versus the market. We are closing the gap while growing quite strongly. It happens that someone is growing much stronger, but the reality is that we are part of those who are still growing, but closing the gap versus the market. In brick and mortar, the gap was of 8 points in the last 9 months, and it's 6 points in the last 3 months, and now it's less than 3 points.
On Amazon, the brand is driving the growth of the category. The gap was 1.4 for CoverGirl above the category at Amazon in the last 9 months. In the last 3 months, CoverGirl is 20 points above the category at Amazon. And in the last month, it's still 20 -- 18, 19 points above the category. So it's clearly there that it's happening. It's clearly there that the advocacy influencer marketing plan (technical difficulty) signs, and we hope to see this translating also on the brick and mortar side of the market.
Given -- regarding the shelf space, we believe that the shelf space resets up spring, the shelf space of our brands would be stable. Hopefully, it will grow in 2025, as you are suggesting it, thanks to our very, very strong plan of innovation, more innovation, quicker beats by a strong influencer and advocacy teams around the world, which hopefully will give us the ability to start to increase our shelf space again. But keep in mind that it's expected to be stable.

Operator

Our next question will come from Charles Scotti with Kepler.

Charles-Louis Scotti

I have 3 actually. The first one, I was pretty impressed by your performance in Asia Pacific. What was behind the strength of your business there, unlike most of your competitors? And more specifically in the Travel Retail channel, it was apparently very strong everywhere for you. And so if you could give us an idea of the breakdown of the Travel Retail business by geography?
Second question on inventories. One of your Paris-listed competitors said that retailers have now rebuilt their inventories, with the supply chain tensions easing. Do you have any view on the level of inventories in the trade in Europe and in the U.S.? And is the expected deceleration of the growth in Q2 related to potential destocking impact?
And finally, just a follow-up question on the question of one of my peers. Your H1 guidance suggest 5% to 8% organic growth in Q2, I guess you may have been cautious again. But why will growth decelerate so much going forward? And do you have already some indication on the sell-out in October and early November pointing to a deceleration?

Sue Y. Nabi

Yes. Charles, this is Sue speaking. So again, regarding the performance that you're referring to in APAC, and indeed, the Travel Retail part has been very, very strong. To answer in small -- specifically in Travel Retail, this company was mainly an entry Prestige fragrance seller 2 or 3 years ago, and we've decided that we are going to play on the full scope of what fragrance market is about. Entry Prestige fragrances, where the company has always been very strong, and this is continuing to grow very, very fast. One of our fastest-growing brand in this channel is Calvin Klein, which is an entry Prestige brand that's doing very, very well. We've added on top of these premium brands, like recently Burberry Goddess, [Chloé], et cetera, and we added also niche offering on top of this.
Next to this, I would say, full lineup of brands occupying all the different price tiers of the fragrance market. We have also 3 makeup brands. We have Kylie Cosmetics, Gucci Makeup, Burberry Makeup, and these are doing very, very well. So this is a second leg of growth engine we are added to this channel.
And number three, last but not least, it's also about a skin care. And there, we have Lancaster that is quite doing very well in this area. I said to you that the brand is having double-digit growth, for example, in Hainan. But we are also starting mainly in domestic markets in the southeast part of the Asian continent with philosophy skin care. That is a brand that is present in a Sephora environment, which we believe has a role to play in this clinical market.
So that's more or less what explains this overperformance. We did a year fiscal '23 at plus 30% in Travel Retail. We are continuing to grow at plus 20% in this channel. And this, again, despite the fact that we are still far under the level of travelers in Europe, specifically Chinese traveler. We believe that only 30% of the levels of Chinese traveler pre-pandemic are now back outside of China. So there is still some room over there if this happens 1 day.
Now when it comes to the questions around the trade in Q2, but also inventory.

Laurent Mercier

Yes, yes, in Q2. So maybe to start on your second part is on data. So we are not seeing any slowdown in categories or sell-out in October. So these are definitely strong element, and this is what we are focusing on. Then number two, on trade inventories. The inventory is very healthy. This is what I can tell you. The only element I will add and which will answer this phase in Q1, Q2 is that, of course, as Sue mentioned at the beginning, is that our Q1 was very strong on innovation, and there is natural pipe fill from our retailers on the great innovation that we are launching and with very, very strong results, which is Burberry Goddess, Hugo Boss Elixir, and we have also Gucci Magnolia. So there is really a mechanical effect of pipe fill for retailers, but which will translate in a very strong sell-out in Q2. So this is really the way you need to model the equation. It's between selling, pipe fill, and Q2 is always a quarter of strong sell-out, especially for Prestige.

Operator

Our next question will come from Chris Carey with Wells Fargo.

Christopher Michael Carey

Just a few quick follow-ups, hopefully. So just on the mix line relative to pricing. Laurent, I was under the impression pricing would be something like mid-single-digit incremental in February, March. I think you said low single digit earlier in the call. I may have misheard you. But is there an expectation for less pricing because you're getting such strong performance on mix and also that inflation is decelerating? Maybe you're seeing less needs to price? Or it's possible, I may just misheard you. And then on the -- it's a small question, but just on the [opalescence] was that just you had built up so much inventory because you wanted to be ready for the sell-in, and it was just a little bit less than you were expecting. And you had to take that on the gross margin in the quarter. And so maybe just any perspective on that, of course, in the context of strong delivery in Q1?

Laurent Mercier

Of course. So let me clarify the first point. I mean we never said that we will do mid-single digit in February. So I want to make it very clear. So now, indeed, we are seeing low single digit. But then you made the point, is that we are really monitoring in a very targeted manner and granular manner indeed because also we have a favorable effect from the mix. And the favorable positive effect from the mix is also driven by the accretive innovations we are putting in place. So in a way, it's really where you put the frontier between pricing or mix.
And of course, we are putting the accretion from the innovation in the mix part. But of course, at the end of the day, the objective is that all these initiatives mix, targeted pricing and also strategic revenue management are here really to increase the average unit price, okay? So and this is really what we put under this umbrella of strategic revenue management.
And second element, yes, we are seeing inflation starting to ease, especially in COGS and transportation. So we are making sure also that we are adapting our growth equation in a smart manner. But I want to be very clear that we keep focusing on value creation and really implementing all the levers that we have in our hands.
So yes, your second question was on the E&O. No, just to be very clear, I mean, the demand this year, there is just some pure mechanical, and I will say, accounting effects that indeed last year due to service level issues in this inventory was pretty low. We rebuilt inventories. This is a strategic decision we are making really to have a service level, which is a good service level. Now we are 96% service level, which is a great achievement. And also to make sure that the sell-out, which is strong, is really successful, and we have the other products.
So it's again, mechanical accounting treatment, but no concern at all in terms of inventory. And that's why now I'm telling you that we are seeing flattish gross margin in Q2, and there will be some acceleration of gross margin in H2 fiscal '24.

Operator

Our next question will come from Ashley Helgans with Jefferies.

Sydney A. Wagner

This is Sydney, on for Ashley. I was just wondering if you could give kind of any color into what you're seeing or expecting for the promotional environment heading into holiday?

Sue Y. Nabi

Laurent, do you want to take this question?

Laurent Mercier

Yes, I mean -- but overall, I mean, I can confirm you and what you see that the sell-out is very strong, and the sell-out is very strong with premiumization. This is what we are seeing both in Prestige and Consumer Beauty. And again, the clear demonstration is that the innovation that we are launching, which are with higher value, higher price, definitely, we are seeing very high demand.
So no, we are not seeing any increase in promotional. Maybe to give a more specific item. I mean last year due to the service level issues, shortage of component, we reduced drastically our giftsets. Giftsets is usually in the mid-teens ratio, last year was much lower. So this year, we are bringing back to a normal level of giftsets, but this is a normal way of animating the category. It's very healthy. But okay, keep this question that we are not seeing indeed overall promotional increase of promotional activity in our categories and in our activities.

Sue Y. Nabi

So as this was the last question, please allow me for some closing remarks.
So first of all, thank you, everyone, for joining us. To sum up, I would say a few things, a few important things. Number one, we are very pleased with the strong Q1 results, which really sets us a great trajectory for the fiscal '24, and we are very excited by the many opportunities that are still ahead for the company.
We are also, I have to say, extremely grateful for the continued confidence and support from all our analysts and investors, as the recently published institutional investor results, again, position Coty as #1 amongst mid-cap companies in our sector. So thank you very much. Thank you again for your trust, and we look forward to speaking with you all very soon.

Operator

Thank you. This does conclude today's call. We appreciate your participation. You may disconnect at any time.