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Coty (COTY) Q4 Earnings In Line, Sales Miss, Stock Down
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Coty Inc. (COTY - Free Report) posted fourth-quarter fiscal 2018 results, wherein the bottom line matched estimates while the top line lagged. However, both earnings and sales improved year over year. The company provided its outlook for fiscal 2019.
Shares of this cosmetics company have declined nearly 7.1% during the pre-market trading session. Moreover, this Zacks Rank #3 (Hold) stock has slumped 11.2% in the past month, compared with the industry’s 3.6% decline.
Quarter in Detail
Adjusted earnings of 14 cents per share were in line with the Zacks Consensus Estimate. Further, the bottom line improved from break-even results in the year-ago quarter. On a GAAP basis, the company reported loss of 24 cents per share compared with loss of 41 cents in the year-ago quarter.
Coty generated revenues of $2,299.4 million, which rose 2.6% year over year but lagged the Zacks Consensus Estimate of $2,305 million. On a constant-currency (cc) basis, revenues increased 0.6%. The company’s organic (LFL basis) revenues inched up 0.3%, propelled by robust growth in the Luxury segment and continued strength in the Professional Beauty segment, partly offset by a decline in Consumer Beauty segment’s organic sales. During the reported quarter, Consumer and Professional Beauty segments included impacts from the Brazilian trucker strike as well as short-term supply chain disturbances due to the consolidation of warehouses, and planning centers in North America and Europe for the integration of P&G’s (PG - Free Report) Beauty Business, acquired in October 2016.
Adjusted gross margin contracted 20 basis points (bps) to 61.9% in the quarter under review, mainly due to disruptions in the supply chain. Additionally, adjusted operating income grew more than two folds (154.6%) to $229.4 million. Further, adjusted operating margin expanded 600 bps to 10%.
Segmental Details
Luxury: Luxury net revenues rose 14.6% to $742.4 million, with organic revenue growth of 5.3%. Growth was backed by strength in Gucci, Tiffany , philosophy, Chloe and Marc Jacobs brands. Further, the segment witnessed strong performances in Europe and North America in the fiscal fourth quarter, led by growth in the United States, U.K., China, France, Latin America and Travel Retail. Adjusted operating income for the Luxury segment improved significantly to $78.1 million from $10 million in the year-ago quarter.
Consumer Beauty: Consumer Beauty revenues declined 5.5% to $1,064.4 million. Organic sales also declined 3.4%, mainly due to supply chain disruptions related to the integration of P&G’s business. However, adjusted operating income in the Consumer Beauty segment rose 44% to $93.6 million, driven by strong efforts to control fixed costs.
Professional Beauty: Professional Beauty net revenues of $492.6 million improved 5.4% year over year and 2.1% organically. Growth was fueled by higher revenues from OPI as well as strength in North America and ALMEA. Adjusted operating income for the Professional segment was $57.7 million, with 60 bps adjusted operating margin expansion to 10.2%.
On a regional basis, net revenues increased 4% in North America, driven by growth in Luxury (backed by strength in Tiffany and Gucci) and Professional Beauty categories, offset by weakness in Consumer Beauty. Sales in Europe improved 11%, owing to robust innovations in Luxury and stable Professional Beauty. Sales in the ALMEA region jumped 10%, courtesy of solid momentum in Luxury and Professional Beauty, and flat performance in Consumer Beauty.
Other Financial Updates
Coty ended the reported quarter with cash and cash equivalents of $331.6 million and net debt of $7,291.6 million.
In fiscal 2018, the company generated $413.7 million of net cash from operating activities, owing to the improvement in profitability, offset by deterioration of working capital. The company’s free cash flow was negative $32.7 million for the fiscal.
Concurrently, the company announced a dividend of 12.5 cents a share, payable on Sep 14 to shareholders of record as on Aug 31.
Outlook
Coty’s fiscal 2018 results demonstrated that the company is on course to turn around its operations, as it progresses with the integration of P&G’s Beauty Business. The company is on track with building and streamlining back office operations, upgrading systems, optimizing manufacturing and logistics, and simplifying overall operations. Simultaneously, the company remains focused on investing in brands and transforming digital capabilities to drive sustainable growth.
The company is encouraged by the progress that it has made in the last two years and anticipates almost completing the integration in fiscal 2019. Notably, it has delivered upon the first half of its synergies target in fiscal 2018 and expects the remaining synergies to help drive operating income growth, and returning its business to low-single-digit LFL (organic) revenue growth.
Delivering upon the anticipated top-line growth, alongside the company’s stringent focus on cost management even after the synergies are fully realized, it is likely to help the company reach its medium-term target of high-teen adjusted operating margin. Based on these iterations, fiscal 2019 is likely to be crucial for the company in meeting its medium-term ambitions.
The company anticipates more than 100 bps adjusted operating margin expansion in fiscal 2019 along with flat-to-modest LFL revenue growth. This is likely to result in mid-teen adjusted operating income growth in the fiscal. Further, the company expects earnings per share of 74-78 cents in fiscal 2019, which is consistent with the operating income target.
However, the company expects the performance across the quarters of fiscal 2019 to be variable based on several factors. Notably, it expects the supply chain disruptions due to logistics and manufacturing consolidation to have a significant impact in the first quarter of fiscal 2019, with a modest tail-end effect in the fiscal second quarter. This is likely to significantly weigh on the company’s top and bottom lines in the fiscal first quarter. This combined with its brand rationalization program is likely to result in a low-teen year-over-year decline in adjusted operating income for the fiscal first quarter. Nonetheless, the company expects effects of these business integration actions to be mostly complete by the end of the fiscal first half. Moreover, the impacts of these actions are already incorporated into its financial targets for fiscal 2019.
Throwing light on the integration-related costs, the company estimates total costs of nearly $1.3 billion, of which, about $1.15 billion have been accrued as of fiscal 2018. The company expects the remaining costs to occur in fiscal 2019-2020 period.
Additionally, the company announced a new cost-savings program, which is independent of its efforts to integrate the P&G business, aimed at boosting top and bottom lines. This program is expected to result in gross savings of up to $150 million in the next three years, alongside incremental $250 million of restructuring charges. The company intends to re-invest a portion of these savings in areas such as digital and e-commerce. Following this, the company expects total net savings of nearly $60 million over the next three years.
Furthermore, as the merger integration is in the final stages, the company is shifting focus to boosting cash flows and reducing leverage. In sync, the company now targets leverage below 4.0x Net Debt/ Adjusted EBITDA ratio by the end of calendar 2020, down from the current ratio of 5.27x.
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Coty (COTY) Q4 Earnings In Line, Sales Miss, Stock Down
Coty Inc. (COTY - Free Report) posted fourth-quarter fiscal 2018 results, wherein the bottom line matched estimates while the top line lagged. However, both earnings and sales improved year over year. The company provided its outlook for fiscal 2019.
Shares of this cosmetics company have declined nearly 7.1% during the pre-market trading session. Moreover, this Zacks Rank #3 (Hold) stock has slumped 11.2% in the past month, compared with the industry’s 3.6% decline.
Quarter in Detail
Adjusted earnings of 14 cents per share were in line with the Zacks Consensus Estimate. Further, the bottom line improved from break-even results in the year-ago quarter. On a GAAP basis, the company reported loss of 24 cents per share compared with loss of 41 cents in the year-ago quarter.
Coty Inc. Price, Consensus and EPS Surprise
Coty Inc. Price, Consensus and EPS Surprise | Coty Inc. Quote
Coty generated revenues of $2,299.4 million, which rose 2.6% year over year but lagged the Zacks Consensus Estimate of $2,305 million. On a constant-currency (cc) basis, revenues increased 0.6%. The company’s organic (LFL basis) revenues inched up 0.3%, propelled by robust growth in the Luxury segment and continued strength in the Professional Beauty segment, partly offset by a decline in Consumer Beauty segment’s organic sales. During the reported quarter, Consumer and Professional Beauty segments included impacts from the Brazilian trucker strike as well as short-term supply chain disturbances due to the consolidation of warehouses, and planning centers in North America and Europe for the integration of P&G’s (PG - Free Report) Beauty Business, acquired in October 2016.
Adjusted gross margin contracted 20 basis points (bps) to 61.9% in the quarter under review, mainly due to disruptions in the supply chain. Additionally, adjusted operating income grew more than two folds (154.6%) to $229.4 million. Further, adjusted operating margin expanded 600 bps to 10%.
Segmental Details
Luxury: Luxury net revenues rose 14.6% to $742.4 million, with organic revenue growth of 5.3%. Growth was backed by strength in Gucci, Tiffany , philosophy, Chloe and Marc Jacobs brands. Further, the segment witnessed strong performances in Europe and North America in the fiscal fourth quarter, led by growth in the United States, U.K., China, France, Latin America and Travel Retail. Adjusted operating income for the Luxury segment improved significantly to $78.1 million from $10 million in the year-ago quarter.
Consumer Beauty: Consumer Beauty revenues declined 5.5% to $1,064.4 million. Organic sales also declined 3.4%, mainly due to supply chain disruptions related to the integration of P&G’s business. However, adjusted operating income in the Consumer Beauty segment rose 44% to $93.6 million, driven by strong efforts to control fixed costs.
Professional Beauty: Professional Beauty net revenues of $492.6 million improved 5.4% year over year and 2.1% organically. Growth was fueled by higher revenues from OPI as well as strength in North America and ALMEA. Adjusted operating income for the Professional segment was $57.7 million, with 60 bps adjusted operating margin expansion to 10.2%.
On a regional basis, net revenues increased 4% in North America, driven by growth in Luxury (backed by strength in Tiffany and Gucci) and Professional Beauty categories, offset by weakness in Consumer Beauty. Sales in Europe improved 11%, owing to robust innovations in Luxury and stable Professional Beauty. Sales in the ALMEA region jumped 10%, courtesy of solid momentum in Luxury and Professional Beauty, and flat performance in Consumer Beauty.
Other Financial Updates
Coty ended the reported quarter with cash and cash equivalents of $331.6 million and net debt of $7,291.6 million.
In fiscal 2018, the company generated $413.7 million of net cash from operating activities, owing to the improvement in profitability, offset by deterioration of working capital. The company’s free cash flow was negative $32.7 million for the fiscal.
Concurrently, the company announced a dividend of 12.5 cents a share, payable on Sep 14 to shareholders of record as on Aug 31.
Outlook
Coty’s fiscal 2018 results demonstrated that the company is on course to turn around its operations, as it progresses with the integration of P&G’s Beauty Business. The company is on track with building and streamlining back office operations, upgrading systems, optimizing manufacturing and logistics, and simplifying overall operations. Simultaneously, the company remains focused on investing in brands and transforming digital capabilities to drive sustainable growth.
The company is encouraged by the progress that it has made in the last two years and anticipates almost completing the integration in fiscal 2019. Notably, it has delivered upon the first half of its synergies target in fiscal 2018 and expects the remaining synergies to help drive operating income growth, and returning its business to low-single-digit LFL (organic) revenue growth.
Delivering upon the anticipated top-line growth, alongside the company’s stringent focus on cost management even after the synergies are fully realized, it is likely to help the company reach its medium-term target of high-teen adjusted operating margin. Based on these iterations, fiscal 2019 is likely to be crucial for the company in meeting its medium-term ambitions.
The company anticipates more than 100 bps adjusted operating margin expansion in fiscal 2019 along with flat-to-modest LFL revenue growth. This is likely to result in mid-teen adjusted operating income growth in the fiscal. Further, the company expects earnings per share of 74-78 cents in fiscal 2019, which is consistent with the operating income target.
However, the company expects the performance across the quarters of fiscal 2019 to be variable based on several factors. Notably, it expects the supply chain disruptions due to logistics and manufacturing consolidation to have a significant impact in the first quarter of fiscal 2019, with a modest tail-end effect in the fiscal second quarter. This is likely to significantly weigh on the company’s top and bottom lines in the fiscal first quarter. This combined with its brand rationalization program is likely to result in a low-teen year-over-year decline in adjusted operating income for the fiscal first quarter. Nonetheless, the company expects effects of these business integration actions to be mostly complete by the end of the fiscal first half. Moreover, the impacts of these actions are already incorporated into its financial targets for fiscal 2019.
Throwing light on the integration-related costs, the company estimates total costs of nearly $1.3 billion, of which, about $1.15 billion have been accrued as of fiscal 2018. The company expects the remaining costs to occur in fiscal 2019-2020 period.
Additionally, the company announced a new cost-savings program, which is independent of its efforts to integrate the P&G business, aimed at boosting top and bottom lines. This program is expected to result in gross savings of up to $150 million in the next three years, alongside incremental $250 million of restructuring charges. The company intends to re-invest a portion of these savings in areas such as digital and e-commerce. Following this, the company expects total net savings of nearly $60 million over the next three years.
Furthermore, as the merger integration is in the final stages, the company is shifting focus to boosting cash flows and reducing leverage. In sync, the company now targets leverage below 4.0x Net Debt/ Adjusted EBITDA ratio by the end of calendar 2020, down from the current ratio of 5.27x.
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Helen of Troy (HELE - Free Report) , with an average earnings surprise of 21.6% in the trailing four quarters and long-term earnings growth rate of 6.1%, currently sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nu Skin Enterprises, Inc. (NUS - Free Report) , with long-term earnings growth rate of 9.7% and an average earnings beat of 1.7% in the last four quarters, also carries a Zacks Rank #2.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>