A month has gone by since the last earnings report for Coty (COTY - Free Report) . Shares have lost about 7.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Coty due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Coty Q1 Earnings Beats Estimates, Sales Drop Y/Y
Coty's first-quarter fiscal 2019 adjusted earnings of 11 cents per share surpassed the Zacks Consensus Estimate of 7 cents and jumped 10% year over year. The bottom line gained from lower taxes.
Coty generated revenues of $2,031.3 million, which tumbled 9.2% year over year and also lagged the Zacks Consensus Estimate of $2,157 million. The company’s organic (LFL basis) revenues fell 7.7%, mainly on account of supply-chain hurdles, which hit LFL revenue growth by nearly 5%. Underlying weakness in the Consumer Beauty segment was also a deterrent.
The company’s supply-chain woes included disruptions related to warehouse and planning center consolidation (in Europe and United States). This had an adverse effect on all three business units. Further, shortages from various external suppliers marred the Luxury unit that was also largely hurt by Hurricane Florence.
Adjusted gross margin contracted 120 basis points (bps) to 60.4% in the quarter under review, mainly due to supply-chain hurdles and escalated freight costs in the Consumer Beauty and Luxury divisions. Additionally, adjusted operating income slumped 28% to $140.8 million due to soft revenues and gross margin along with currency headwinds. This was partly compensated by lower fixed costs stemming from the company’s synergies.
Luxury: Luxury net revenues rose 3.7% to $792.9 million, while LFL revenues slipped 2.1% due to supply-chain headwinds. Nevertheless, underlying growth was backed by strength in Gucci, Tiffany, Chloe and Miu Miu brands. The company also witnessed sturdy results from Burberry, which will form part of Coty’s LFL base in the second quarter of fiscal 2019. Region wise, the segment witnessed strong performances in Europe and in emerging markets, especially Asia. On the contrary, North America and Ttravel retail businesses were hit by supply chain and impacts from the hurricane. Management intends to fully offset the lower shipments stemming from hurricanes in the second quarter, which includes the crucial holiday season. Also, the company is on track to resolve supply-chain hurdles.
Consumer Beauty: Consumer Beauty revenues plunged 20.6% to $828.8 million and LFL sales declined 14%. Results were hurt by supply-chain disruptions, including customer penalties and increased promotions. These factors led to a sequential decline in the segment. Also, underlying weakness owing to persistent softness in mass beauty categories in United States and Europe dented results.
Professional Beauty: Professional Beauty net revenues of $409.6 million fell 4.9% year over year and 2.6% on LFL basis as disruptions at Coty’s North American distribution center hampered its hair and nail businesses in the region. The segment otherwise witnessed underlying growth, fueled by brands like Wella, and robust growth in ALMEA and Europe. Also, contributions from ghd drove underlying performance.
On a regional basis, net revenues declined 14% (down 15% LFL) in North America due to continued softness at Consumer Beauty, including supply-chain hurdles. Also, effects of hurricanes and supply chain on Professional Beauty hit the region. Sales in Europe tanked 10% (9% LFL) as improvements in Luxury and Professional Beauty units were countered by weakness in the travel retail and Consumer Beauty. Sales in the ALMEA region dipped 1%, though it rose 5% LFL, courtesy of solid momentum in Luxury and Professional Beauty, and modest improvements in Consumer Beauty.
Other Financial Updates
Coty, which shares space with Estee Lauder ended the reported quarter with cash and cash equivalents of $423.3 million and net long-term debt of $7,789.7 million.
During the first quarter, the company used $81.9 million as net cash from operating activities and free cash flow was negative $215.5 million.
In a separate press release, the company announced dividend of 12.5 cents a share, payable on Dec 14 to shareholders of record as on Nov 30.
Coty’s performance remained disappointing and weaker than expected in the first quarter, owing to supply-chain headwinds and persistent weakness in Consumer Beauty unit. While the company is on track to mitigate supply-chain issues, it is expected to be fully offset only by the third quarter of fiscal 2019.
The company also announced plans to modify its distribution center to minimize the effect of these hurdles on its business. Despite these efforts, the company continues to expect synergies of about $225 million in fiscal 2019 and $750 million by the end of fiscal 2020. Barring supply-chain hurdles, the company’s performance remained strong in the Luxury and Professional Beauty units, driven by robust innovations and solid demand.
The Consumer Beauty unit however remained weak on an underlying basis as well, due to softness in certain developed markets, stiff competition and challenges associated with certain brands. Nonetheless, Coty is on track to stabilize this unit. Also, it is making aggressive efforts to resolve the supply-chain related barriers. The company is also on track with the integration of P&G Beauty business.
Though supply-chain issues are likely to impact fiscal 2019 results, the company anticipates operating profit and margin to improve in the fiscal on the back of considerable reductions in fixed costs and impacts from synergies. Also, Coty is committed toward deleveraging and anticipates achieving a net debt to adjusted EBITDA ratio of less than 4.0x by the end of 2020.
For second-quarter fiscal 2019, management envisions underlying net revenue trends to improve sequentially in all segments, even amid supply-chain headwinds. Management expects Luxury and Professional Beauty segments to revert to year-over-year LFL revenue growth, though Consumer Beauty segment LFL revenues are expected to fall at a high single-digit rate. Coty’s operating income in the quarter is likely to decline moderately on account of currency woes and the remaining supply-chain obstacles. Moreover, bottom-line growth is expected to bear the brunt of a tough year-over-year comparison stemming from tax gains recorded in the year-ago period.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -13.44% due to these changes.
Currently, Coty has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Coty has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.