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Coty's (COTY) Stock Gains 7% on Q3 Earnings & Sales Beat

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Coty Inc. (COTY - Free Report) posted third-quarter fiscal 2018 results, wherein both the top and the bottom line surpassed the Zacks Consensus Estimate. Notably, this marked the company’s third and fifth straight quarter of earnings and sales beat, respectively.

Shares of the company rallied 6.7% during the pre-market trading session. Let’s see if the solid performance can revive Coty’s price performance. Shares of this cosmetics company have declined 2.5% in the past six months, as against the industry’s 7.2% rise.

Let’s take a closer look at the quarterly results.

Quarter in Detail

The company’s adjusted earnings of 13 cents per share surpassed the Zacks Consensus Estimate by a penny. However, the bottom line declined 13% year over year. On a GAAP basis, the company reported loss of 10 cents per share compared with a loss of 22 cents in the year-ago quarter.

The company generated revenues of $2,222.7 million, which advanced 9.4% year over year and topped the Zacks Consensus Estimate of $2,187 million. On a constant-currency (cc) basis, revenues increased 3.4%, driven by contributions from Younique and Burberry. Coty’s organic revenues inched up 0.2% including contributions from Younique. Organic revenues were also propelled by robust growth in Luxury and continued strength in the company’s Professional Beauty segment, partly offset by a modest fall in Consumer Beauty organic sales.

Coty Inc. Price, Consensus and EPS Surprise

Adjusted gross margin increased 100 basis points (bps) to 64.3% in the quarter, driven by strong performance in all its segments. Additionally, adjusted operating income jumped 9.4% to $227.8 million on the back of improved gross margins and stringent cost controls. These upsides were partly offset by enhanced marketing spend. Further, adjusted operating margin contracted 10 bps to 10.2%.

Segment Details

Luxury: Luxury net revenues rose 18.6% to $752.5 million (up 11.8% on a currency neutral basis). Currency-neutral revenue growth is attributable to a 6.1% rise in organic growth that was backed by success of fragrances from Tiffany (TIF - Free Report) and Gucci as well as Chloe Nomade and CK One. It also includes 5.7% contribution from Burberry. Adjusted operating income for the Luxury segment surged 16.6% year over year to $100.4.

Consumer Beauty: Consumer Beauty revenues advanced 3.3% to $1,021.7 million. However, sales in the segment declined 1.2% on a currency-neutral basis, thanks to 4.4% fall in organic growth stemming from wreak brands and pricing actions undertaken in Brazil. These were partially offset by growth in the ALMEA region. Adjusted operating income in the Consumer Beauty segment declined 19.9% to $97.3 million.

Professional: Professional Beauty net revenues of $448.5 million improved 9.7% (up 1.9% on a currency-neutral basis). Currency-neutral sales were fueled by higher revenues from OPI, backed by growth in gel restage and lacquers. Adjusted operating income for Professional segment more than doubled to $30.1 million during the quarter.

On a region-wise basis, net revenues increased 4% in North America, driven by gains from Younique and Burbery as well as strength in Tiffany and Gucci Bloom. However, the same was countered by weakness in U.S. color cosmetics. Sales in Europe improved 15.1% owing to success of Tiffany and Gucci Bloom fragrances.  Sales in the ALMEA region jumped 7%, courtesy of solid growth in fragrances and color cosmetics in China, partially countered by lower revenues in Brazil.

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $460.8 million and net debt of $7,470.4 million.

During the quarter, the company used net cash from operating activities of $118.9 million, owing to increased working capital requirements. The company’s free cash flow was negative $205.4 million.

Concurrently, the company announced a dividend of 12.5 cents a share, payable on Jun 14 to shareholders of record as on May 31.


Management is pleased with solid growth in the Luxury business and ongoing momentum in the Professional segment. Although performance in the Consumer Beauty segment has been uneven, signs of improvements keep management encouraged. The company is optimistic about its recent launches that have been yielding favorably. Also, the company has been streamlining its portfolio to focus on brands with high growth potential and drive long-term growth.

Considering these factors and the year-to-date performance, the Zacks Rank #3 (Hold) company continues to expect modest net organic revenue growth in the second half of fiscal 2018. Management expects healthy margin improvement over the second half, with maximum contributions coming from the fourth quarter.
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