Coty Profit Momentum Continues in Q3, Delivering Early Results Across Brand Portfolio

Rhea-AI Summary

Coty Inc. (NYSE: COTY) reported Q3 fiscal 2021 results with a 3% revenue decline, but signs of recovery emerged, particularly in Asia Pacific and e-commerce. Adjusted EBITDA reached $183.2 million, marking a significant improvement. Despite challenges, the company's mass beauty segment showed market share gains, while gross margins expanded to 62.2%. Coty is on track for $300 million in cost savings and aims for reduced financial net debt by leveraging its Wella stake. The CEO expressed confidence in the company's strategic growth plans.

Positive

• Adjusted EBITDA rose to $183.2 million with a margin of 17.8%.
• Significant cost savings of approximately $110 million in Q3, totaling over $270 million year-to-date.
• Mass beauty brand CoverGirl gained market share for the first time in over 4 years.
• E-commerce sales grew nearly 30% in Q3.
• Gross margin expanded to 62.2%, up 450 bps year-on-year.

Negative

• Q3 revenues declined 3%, or 5.5% LFL, due to COVID impacts in Europe.
• Reported operating loss of $1.4 million.
• Mass beauty revenues decreased by 14.5% in Q3.

Coty Inc. (NYSE: COTY) ("Coty" or "the Company") today announced continued improvement in its financial results and early evidence of recovery across its operations for the third quarter of fiscal year 2021, ended March 31, 2021.

In Q3, revenues declined 3%, or 5.5% LFL, in a persisting COVID context in Europe and select regions. At the same time results were buoyed by +20% LFL growth in Asia Pacific, 30% growth in e-commerce, and a relatively stable performance in the Americas, including strong growth in U.S. prestige sales. Brands like Gucci, Burberry and Marc Jacobs were standouts, with double digit growth in the quarter, and Coty continued to build upon its newer prestige engines of growth in cosmetics and skincare. The 2% LFL growth in the prestige sales was noteworthy, given Coty's higher commercial weighting in Europe and the continued active reduction of sales in low quality channels, which represented a high single digit negative impact to the prestige sales in the last two years.

In the mass channel, Coty’s strategic plans delivered early results, with CoverGirl gaining market share over the last 5 weeks according to the latest scanner data available; a first in over 4 years. While Coty's mass beauty revenues in Q3 declined 14.5%, the Company’s mass beauty retail sell-out returned to growth in the month of March.

Coty’s progress on profitability over last two quarters continued in Q3, with an adjusted EBITDA* of $183.2 million with a 17.8% margin, up over $180 million versus last year, and a reported operating loss of $1.4 million, an improvement of nearly $300 million versus last year. This was supported by reported and adjusted gross margin expansion up 450 bps year-on-year to 62.2%; fueled by revenue and mix management, lower excess & obsolescence, and improved demand planning. During the quarter, Coty continued to reduce its costs base, with savings totaling approximately $110 million in the quarter. Fiscal year-to-date cost savings totaled over $270 million, and the Company remains on track to achieve its target of approximately $300 million in cost savings in FY21. Fiscal year-to-date, adjusted EBITDA totaled $633.0 million, up 50% versus the last year.

As anticipated, Financial Net Debt at the end of Q3 totaled approximately $5.1 billion. With an increase in the value of Coty's retained Wella stake to approximately $1.25 billion¹ at quarter-end, the Company's Economic Net Debt totaled approximately $3.9 billion. Coty also successfully raised $900 million in secured notes in April 2021, extending the maturity profile of its debt.

In line with Coty's recently unveiled growth acceleration strategy, the Company continues to make progress across each of its strategic pillars. This includes initial market share gains for CoverGirl in the U.S., with the re-positioning plans for Rimmel and Max Factor in Europe on track for the fourth quarter. Luxury fragrance demand remained strong in the key U.S. market, with Coty's portfolio outperforming the market. In addition, Coty continues to build upon its newer prestige engines of growth in cosmetics and skincare, which includes very strong growth of Gucci Beauty globally as well as encouraging results of Lancaster in China and Hainan. Meanwhile, the performance of digital and e-commerce grew close to 30% in Q3.

Commenting on the operating results, Sue Y. Nabi, Coty's CEO, said:

"Our Q3 marked another strong milestone in our journey to rejuvenate Coty's position as a global beauty powerhouse. In less than a year, the leadership team and the broader organization have successfully mapped out our strategy, activated our brand and category plans, while generating operational improvements, and strengthening our financial position.

From a results standpoint, in Q3 we saw a significant improvement in our sales trends even as we continued our efforts to strengthen the health of our business and brands by cutting sales in low quality channels. Importantly, the prestige sales returned to growth as the impact of the pandemic abated in many markets. We have seen strong momentum in several of our key markets, with China sales growing double-to-triple digits versus FY20 and FY19, and U.S. prestige sales up high single digits in the quarter and nearly flat in the fiscal year-to-date. While Europe sales remain under pressure, we are confident that the imminent lifting of COVID restrictions will drive improvement in this key region.

Financially, we took a significant step forward in reshaping our profitability profile, with gross margins over 62% and EBITDA margins up 18 percentage points year-on-year, despite a lower topline. With our year-to-date adjusted EBITDA of $633 million reaching over 80% of our FY21 target of approximately $750 million, we have generated capacity to significantly increase our marketing investments in Q4 to support our strategic growth initiatives while at the same time delivering on our financial commitments. We are also progressing on our deleveraging objectives, driving leverage towards 5x exiting CY21, and the recent successful $900 million bond issuance has helped Coty's maturity profile.

Finally, we were pleased to recently share our strategy for accelerating sales and profit growth in the coming years, anchored in six strategic pillars: 1) stabilization of Consumer Beauty make-up brands and Mass fragrances; 2) acceleration of luxury fragrances and establishing Coty as a key player in Prestige make-up; 3) building a Skincare portfolio across prestige and mass channels; 4) enhancing e-commerce and Direct-to-Consumer (DTC) capabilities; 5) expanding in China through Prestige and select Consumer Beauty brands; and 6) establishing Coty as an industry leader in sustainability.

With this clear path towards value creation, a strong portfolio of desirable beauty brands, and a renewed sense of tempo throughout the organization, I am confident in Coty's ability deliver on its near and long-term objectives."

*Adjusted financial metrics used in this release are non-GAAP. See reconciliations of GAAP results to Adjusted results in the accompanying tables.

1Based on fair market value, reflecting the final Wella capital structure

Highlights

• 3Q21 net revenue trends show solid sequential improvement, despite COVID-related lockdowns across many key markets, particularly in Western Europe. Net revenues declined 3% as reported and 5.5% LFL
• Reported operating loss was $1.4 million
• 3Q21 adjusted operating income increased to $95.6 million from an adjusted operating loss of $68.2 million, with 1570 bps of margin expansion to 9.3%
• Robust growth in 3Q21 with adjusted EBITDA of $183.2 million, increased from $(1.4) million last year, with an adjusted EBITDA margin of 17.8%
• 3Q21 cost reductions remained robust with an additional approximately $110 million of reductions, bringing the year-to-date total to over $270 million
• 3Q21 free cash outflow of $218.4 million was, as expected, negatively impacted by the over $100 million reversal of a working capital benefit in 2Q21 related t

FAQ

What were Coty Inc.'s Q3 2021 revenue results?

Coty reported a 3% revenue decline in Q3 2021.

How did Coty perform in e-commerce during Q3 2021?

Coty's e-commerce sales increased by nearly 30% in Q3 2021.

What was Coty’s adjusted EBITDA for Q3 2021?

Coty's adjusted EBITDA for Q3 2021 was $183.2 million.

Did Coty experience any market share growth in its beauty brands?

Yes, CoverGirl gained market share for the first time in over 4 years.

What challenges did Coty face in Q3 2021?

Coty faced a 3% revenue decline largely due to COVID-related impacts, particularly in Europe.