COTY DELIVERS STRONG 1Q22 RESULTS, WELL AHEAD OF EXPECTATIONS
Strong Gross Margin Expansion and Cost Control Fuel Reinvestment
And Progress on Each Strategic Pillar
FY22 Sales Growth Outlook Raised to Low to Mid Teens Growth at Current FX Levels
November 18th Investor Day to Detail Strategic Progress and Medium Term Trajectory
In Q1, revenues increased 22%, or 20.6% LFL, surpassing guidance of high-teens LFL growth, with a combination of strong brick & mortar growth and 23% growth in e-commerce. Coty's Prestige business delivered superior 35% reported and 34% LFL growth in the quarter, despite a low single digit negative impact from the continued reduction of sales in low quality channels. Prestige fragrance sales increased strongly across nearly all brands, with particularly strong performance from Gucci, Burberry, Hugo Boss, Marc Jacobs, Calvin Klein, and Chloe. This momentum was fueled by a very strong fragrance launch calendar in Q1 with particular standout results from Gucci Flora Gorgeous Gardenia and Burberry Hero. At the same time, Prestige cosmetics sales more than doubled year-on-year, led by Gucci makeup and the relaunch of Kylie Cosmetics. Regionally, the U.S. and China continued to deliver very robust performance, Travel Retail more than doubled led in particular by Asia and Europe, while trends in many Western European markets continued to improve.
During the quarter, Consumer Beauty revenues increased 4% as reported and 3% LFL, as the global mass beauty category returned to growth and Coty continued to make progress towards share stabilization. CoverGirl generated double digit percent sell-in and sell-out growth, growing market share in 4 of the last 7 months, with outsized momentum in the Magnificent 8 franchises. Meanwhile, the re-positioning of both Rimmel and Max Factor, which kicked off in the summer, have also been showing solid progress across key European markets. Rimmel's Wonder'Extension mascara has become its most successful mascara launch in the critical UK and German markets, with momentum building exiting Q1 with the launch of Rimmel's first-to-mass Kind & Free range of clean, vegan and cruelty free cosmetics products. At the same time, Max Factor's launch of its Facefinity foundation with Priyanka Chopra Jonas as spokesperson have propelled Max Factor to market share gains in the UK for the first time in years.
The strong topline growth was matched by very robust profitability growth in Q1, supported by both significant gross margin expansion and additional cost reductions, enabling a significant step-up in marketing spend, with working media doubling year-on-year. Reported gross margins expanded 460 bps in the quarter to 63.2%, while adjusted gross margin was up 480 bps to 63.4%, above pre-pandemic levels, driven by a combination of product and channel mix, improved excess & obsolescence, pricing and mix benefits, and higher production volumes. This substantial expansion fueled reinvestment behind key strategic initiatives. In addition, Coty continued to lower its cost base, with year-over-year savings of approximately $60 million, showing significant progress towards the FY22 savings target of over $90 million. The Company has now cumulatively achieved close to $400M of cost savings versus the FY20 baseline, and remains on track to achieve approximately $600M of savings by FY23. The gross margin improvement and cost reductions allowed Coty to continue to reinvest behind its brands and highest ROI opportunities, as working media more than doubled versus last year, and total A&CP remained consistent sequentially at ~26% of sales. At the same time, Coty delivered 1Q22 reported operating income of $17.2 million and adjusted EBITDA of $278.5 million, increasing 67% from last year and resulting in an adjusted EBITDA margin of 20.3% or 550 bps improvement versus 1Q21.
Financial Net Debt improved by approximately $200 million to just under $5 billion at the end of 1Q. Free cash flow was strong in a seasonally weaker quarter at $240.7 million. With an increase in the value of Coty's 40% Wella stake at quarter end to approximately $1.65 billion at quarter-end, the Company's Economic Net Debt totaled approximately $3.3 billion.
Commenting on the operating results, Sue Y. Nabi, Coty's CEO, said:
"Our objective coming into fiscal 2022 was to build on the great results we delivered last year and further execute on our strategic growth pillars. I am very pleased to say that we are off to a great start, building upon our success. Q1 marks the fifth consecutive quarter of Coty delivering results inline to ahead of expectations. Importantly, our Q1 results exemplify the virtuous cycle that we have been working to create, where our strong topline performance coupled with sustained gross margin expansion and cost initiatives, fuel both profit expansion and targeted re-investments to support future growth.
Coty's successful execution across each of our strategic pillars is exemplified in our Q1 performance. The repositioning of three key Consumer Beauty brands - CoverGirl, Rimmel and Max Factor - are taking hold, returning the overall segment to growth and pushing the Consumer Beauty business to share stabilization. Gucci Flora and Burberry Hero are well on their way to becoming global fragrance icons, helping to accelerate our prestige fragrance portfolio, while the assortment and distribution expansion of Gucci and Kylie cosmetics are solidifying Coty as a key player in prestige cosmetics. In skincare, Lancaster is building momentum in Hainan as the lead market for its repositioning, with several exciting initiatives to come in our skincare portfolio in the coming months. Our e-commerce sales continued its momentum, with strong growth across both Prestige and Consumer Beauty, with total e-commerce sales up 23%. And the combination of these areas fueled close to 50% growth in China. Finally, on sustainability, we have concluded our footprint study reflecting Coty's scope following the Wella divestiture, and will be publishing our second sustainability report very soon.
Importantly, even as we tracked industry-wide headwinds ranging from select component shortages, supply chain bottlenecks, and inflationary pressure in materials and freight, the strength of our business model and the agility of our teams allowed to us to exceed our sales guidance and deliver nearly 500 bps of gross margin expansion. We feel confident about our prospects for the remainder of the year and we are therefore raising our FY22 sales outlook to low-to-mid teens growth from our previous guidance of low teens growth. While inflation impact is expected to step up in the second half of FY22, we believe the impact is quite manageable, particularly as we double-down on accretive innovations and premiumizing our portfolio. As a result, we continue to expect gross margin expansion for the year as compared to FY21. We expect FY22 adjusted EBITDA of $900M at a minimum, as we are intentionally reinvesting our gross margin gain and costs savings in our brands to maximize value.
Fifteen months into our turnaround, I am highly encouraged by the strength of our portfolio, our people, and our strategic path, which together are delivering results in record time as we transform Coty into a true leader in beauty. I look forward to sharing more details on our progress and medium term trajectory at our Investor Day in New York City next week on November 18th."
1Based on fair market value, reflecting the Wella capital structure as of September 30, 2021