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Coty's (COTY) Stock Up More Than 10% on Q1 Earnings Beat

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Shares of Coty Inc. (COTY - Free Report) rallied 13.6% on Nov 6, owing to better-than-expected earnings in first-quarter fiscal 2020. However, earnings declined year over year mainly due to the absence of last year’s tax benefits. Also, revenues were soft due to persistent weakness in the Consumer Beauty unit. Nevertheless, the Luxury segment delivered a robust performance.

The quarter marked the beginning of Coty’s turnaround. The Zacks Rank #3 (Hold) company divested Younique on Sep 16, which was excluded from its September results. This will likely help the company improve its Consumer Beauty unit performance, which had been battling weakness in Younique for long.

Coty’s shares have more than doubled year to date, easily outpacing the industry’s growth of close to 40%.

Quarter in Detail

Adjusted earnings of 7 cents per share came a penny ahead of the Zacks Consensus Estimate. However, the bottom line declined 36% year over year, due to the absence of last year’s tax benefit. 

Coty Inc. Price, Consensus and EPS Surprise

Coty Inc. Price, Consensus and EPS Surprise

Coty Inc. price-consensus-eps-surprise-chart | Coty Inc. Quote

Coty generated revenues of $1,942.8 million, which missed the Zacks Consensus Estimate of $1,977 million. Moreover, the top line fell 4.4% year over year. Currency translations negatively impacted revenues to the tune of 2.4% and organic (Like for Like or LFL basis) revenues slipped 1.1%. Declines at Younique had a 1% adverse impact on Coty’s LFL revenues. Further, strength in Luxury and Professional Beauty LFL revenues was offset by weakness in the Consumer Beauty unit.

Adjusted gross margin expanded 160 basis points (bps) to reach 62%, courtesy of increased mix of higher-margin Luxury and Professional Beauty divisions. Also, improved margins at both divisions, better COGS productivity in the Luxury unit, and improved price and mix in the Professional Beauty unit aided gross margin expansion.

Additionally, adjusted operating income came in at $154.7 million, up 9.9% year on year. This includes negative currency impacts of 4%. Adjusted operating margin came in at 8%, up 110 bps on the back of gross margin growth and stringent fixed cost control.

Segmental Details

Luxury: Net revenues in the segment inched up 1.7% to $806.7 million, while LFL revenues increased 4.4%. The unit’s performance was driven by growth in ALMEA and Europe regions, along with strength in the fragrance category. Fragrance sales were buoyed by brands like Burberry, Gucci, Hugo Boss and Chloe. Geopolitical disturbances in Hong Kong and the nearby Travel Retail network acted as deterrents. Adjusted operating income surged 26% to $128.3 million and adjusted operating margin improved 310 bps to 15.9%.

Consumer Beauty: Consumer Beauty revenues decreased 13.5% to $716.5 million, while LFL sales declined 9.7%. Results were hurt by declines in Younique. Region-wise, revenues in North America were under pressure due to reductions in shelf space and persistent weakness in the mass beauty market. Further, the segment saw revenue declines across color cosmetics, retail hair, body care and mass fragrances categories. The segment posted an adjusted operating loss of $14.2 million against income of $14.8 million in the year-ago period.

Professional Beauty: Net revenues in the segment amounted to $419.6 million, up 2.4% year over year and 5.1% on a LFL basis. The unit’s performance was fueled by strength across all regions. Ghd continued to deliver solid growth in all channels and regions. Adjusted operating income in the category soared to $41.6 million, with the margin expanding 410 bps to 9.9%.

Regional Results

On a regional basis, net revenues in North America declined 9% (7.1% on a LFL basis) year on year to $586.6 million. Sales in Europe dropped 0.3% (up 4.4% at LFL) to reach $869.6 million. Sales in the ALMEA region declined 5.4% (down 3.1% at LFL) to $486.6 million.

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $350.4 million and net long-term debt of $7,453.5 million.

During the quarter, the company provided $39.9 million of net cash from operating activities. Also, it used a free cash flow of $46.5 million.

Further, the company paid out a dividend of 12.5 cents a share on Sep 30. Also, concurrent with its earning release, Coty declared a dividend of 12.5 cents per share, payable on Dec 27, to shareholders of record as of Nov 18.

Other Developments

On Sep 16, Coty concluded the divestiture of its 60% stake in Younique. Also, on Oct 21, the company stated that it is seeking options for its Professional Beauty unit and related hair brands. The company also unveiled plans to explore alternatives for its Brazilian operations. The review process also includes the intentions of a divestiture.

Outlook

For fiscal 2020, management expects net LFL revenues to be stable to slightly lower from the fiscal 2019 level. Further, it expects adjusted operating income (at constant currency) to increase 5-10% year on year, after considering investments for brand growth. Adjusted earnings are likely to depict mid-single-digit growth. Free cash flow is likely to improve moderately year on year.

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