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Coty's (COTY) Earnings Miss Estimates in Q3, Sales Down

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Coty Inc. (COTY - Free Report) released third-quarter fiscal 2020 results, with the bottom line missing the Zacks Consensus Estimate and declining year over year. Nevertheless, the top line beat the consensus mark. However, the metric fell from the prior-year quarter’s figure.

Quarter in Detail

Adjusted loss of 8 cents per share was wider than the Zacks Consensus Estimate of a loss of a cent. Moreover, the bottom line deteriorated on a year-over-year basis due to lower adjusted net income.

Coty generated revenues of $1,528 million, which surpassed the Zacks Consensus Estimate of $1,513.8 million. However, the top line fell 23.2% year over year. Currency translations negatively impacted revenues to the tune of 2.3% and organic (Like for Like or LFL basis) revenues slipped 19.5%. The downside was caused by weakness across all segments thanks to coronavirus-induced lockdowns.

Adjusted gross margin contracted 260 basis points (bps) to 60.3%, thanks to reduced volumes induced by the coronavirus outbreak. Also, higher excess and obsolescence expenses along with underutilization costs resulting from manufacturing plant closures were deterrents.

Adjusted operating income came in at $0.1 million, down from $229.5 reported in the year-ago quarter.  Adjusted operating margin came in at 0.0%, down from 11.5% reported in the year-ago quarter, thanks to reduced gross margin, fixed cost deleverage along with unfavorable foreign currency impact.

Coty Inc Price, Consensus and EPS Surprise

Coty Inc Price, Consensus and EPS Surprise

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

Channel-Wise Details

Luxury: Net revenues in the segment fell 22.7% to $563.9 million, while LFL revenues declined 26.3%. The downside was caused by closures of perfumeries, department stores as well as specialty retailers worldwide.

Consumer Beauty: Consumer Beauty revenues declined 28.3% year over year to $602.7 million while LFL sales fell 16.9%. In March, sales in the segment declined significantly thanks to reduced traffic in drugstores and mass retailers globally amid the coronavirus outbreak. Also, softness in the color cosmetic category was a headwind.   

Professional Beauty: Net revenues in the segment amounted to $361.4 million, down 14.2% year over year and 12% on a LFL basis. The unit’s performance was marred by shutdown of salons during March. Growth in ghd was not enough to offset declines in Hair and Nail product categories.

Segment Results

Net revenues in Americas declined 15% (down 19% on a LFL basis) year on year to $492.6 million. Sales in EMEA dropped 22% (down 20% at LFL) year over year to $550.6 million. Sales in the Asia Pacific region declined 37% (down 35% at LFL) year on year to $124.7 million. Net revenues in Professional dropped 14% (down 12% at LFL) year over year to $360.1 million.

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $1,278.5 million and net long-term debt of $9,172.0 million.

During nine months ended Mar 31, 2020, the company provided $204.5 million of net cash from operating activities.

On Mar 27, the company paid out a quarterly dividend of 12.5 cents per share. Further, in an attempt to perverse its cash amid the coronavirus crisis, management has decided to suspend its dividends until at least Apr 1.

Other Developments

On May 11, management formed a strategic partnership with a global investment firm, KKR, which resulted in an instant investment of $750 million by the latter via convertible preferred shares in Coty. Moreover, KKR and Coty are likely to sign a partnership deal for the Professional Beauty and Retail Hair businesses. Per the deal, KKR is expected to buy majority stake in the above mentioned business for an enterprise value of $4.3 billion.

The company also unveiled its plans to reduce fixed costs by $700 million over the next 30 months amid the coronavirus crisis. This will support Coty to remain on track to achieve its target to report mid teens operating margins by fiscal year 2023.

Price Performance

Shares of the Zacks Rank #3 (Hold) company have lost 55.5% in the past three months compared with the industry’s decline of 25.2%.


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