Coty Inc. Reports Fiscal Second Quarter 2020 Results

Coty Inc. Reports
Fiscal Second Quarter 2020 Results
 
PRESS RELEASE
February 5, 2020

 
Q2 Results In-line with Expectations

Strong Progress on Turnaround Pillars of Gross Margin and Cash Flow

Full Year FY20 Outlook Confirmed

 
NEW YORK - February 5, 2020 -- Coty Inc. (NYSE: COTY) today announced financial results for the second quarter of fiscal year 2020, ended December 31, 2019.
Highlights
  • 2Q20 net revenue decreased 6.6%, with 1.4% organic LFL decline
  • LFL growth in Luxury and Professional Beauty was offset by a decline in Consumer Beauty
  • 2Q20 adjusted operating income of $325.0 million grew 1% YoY
  • In 1H20, adjusted operating income grew 8.5% on a constant currency and scope basis
  • Adjusted EPS of $0.27, rose 13% YoY, including a one-time tax benefit of $0.015 per share 
  • 2Q20 free cash flow of $363.5 million improved by $169.6 million from the prior year period, bringing the total free cash flow for the first half to $317.0 million
 
Commenting on the operating results, Pierre Laubies, Coty CEO said:
 
"Our turnaround plan has now been underway for two quarters, and we are confident that the actions we are taking will build a much healthier business and growth. We saw momentum across many of our priority Luxury brands, including Burberry, Gucci, Tiffany and Hugo Boss, while continuing to grow our footprint in Luxury color cosmetics. Our global sell-out trends continue to improve in key mass beauty categories, and brands like Sally Hansen and Rimmel are gaining share in several core countries. The organization remains vigilant in driving strong gross margin improvement, activating the levers at the center of our strategy: mix management, select price increases, more disciplined promotions, and foregoing low value sales. This has allowed us to continue to increase the working media investments behind our brands. Although we are in the early stages of deploying our strategy and much work remains ahead, we continue to be very enthusiastic about the business we are building and our growth prospects."
 
Commenting on the financial results, Pierre-André Terisse, Coty CFO said:
 
"Our second quarter results were in-line with our expectations, and underpinned by strong results in our gross margin and free cash flow generation. This makes me confident in our ability to achieve our targets for the year.  In the second half, we will start implementing restructuring and supply chain improvement, as per our turnaround plan. Additionally, we are progressing as planned with our strategic review, with strong interest from multiple parties, and continue to target a decision by this summer.  Last, we have now commenced a strategic partnership with Kylie Jenner, and we look forward to building a high growth, digitally native beauty brand. In sum, we are continuing to execute on the three pillars of our roadmap, including implementing our turnaround plan, refocusing on our core fragrances, cosmetics and skincare businesses in conjunction with a substantially improved leverage profile, and amplifying our growth potential."
FY20 Outlook
The FY20 outlook remains unchanged:
  • Net Revenues: Stable to slightly lower LFL
  • Adjusted Operating Income: 5-10% YoY growth, at constant FX and portfolio scope, after increased working media investment behind our brands
  • Adjusted EPS: Mid-single digit growth.
  • Free Cash Flow: Moderate improvement YoY.

 
Financial Results
Revenues:
  • 2Q20 reported net revenues of $2,345.0 million decreased 6.6% year-over-year, including a negative foreign exchange (FX) impact of 1.6%. Like-for-like (LFL) revenue decreased 1.4% . The LFL performance was driven by a decline in the Consumer Beauty division of 6.7% LFL, partially offset by solid growth in the Professional Beauty and Luxury divisions of 2.2% and 1.3% LFL, respectively.
  • Year-to-date reported net revenues of $4,287.8 million decreased by 5.6%, with a LFL revenue decline of 1.3%. The LFL decline was driven by softness within Consumer Beauty, even as performance in the division improved sequentially.
Gross Margin:
  • 2Q20 reported gross margin of 63.4% increased by 150 bps from the prior-year period, while the adjusted gross margin of 63.4% increased by 130 bps, driven by the mix shift toward the higher-margin Luxury and Professional Beauty divisions, as well as strong gross margin expansion in the Luxury division.
  • Year-to-date reported gross margin of 62.7% was up 160 bps from the prior year, while the adjusted gross margin of 62.7% increased by 140 bps, fueled by the mix shift toward the Luxury and Professional Beauty divisions and the strong progress in the Luxury division.
Operating Income:
  • 2Q20 reported operating income of $35.4 million increased versus a 2Q19 reported operating loss of $804.6 million, due to the $965 million impairment charge in the prior year partially offset by an increase in the restructuring charges.
  • 2Q20 adjusted operating income of $325.0 million rose 0.8% from the prior year, despite foreign exchange headwinds of approximately 2%. The adjusted operating margin of 13.9% increased 110 bps from the prior-year period. This operating margin expansion reflects the strong gross margin, partially offset by higher SG&A, as increased working media and bad debt expense were balanced by strong non-working media and cost controls.
  • Year-to-date reported operating income of $161.4 million compared to reported operating loss of $825.3 million in the prior year due to the impairment charge in the prior year. Year-to-date adjusted operating income of $479.7 million rose by 3.6% from the prior year, with a margin of 11.2%. Year-to-date adjusted operating income grew 8.5% on a constant currency and scope basis, excluding Younique's adjusted operating income of $9.4 million in the prior year.
Net Income:
  • 2Q20 reported net loss of $21.1 million compared to a reported net loss of $960.6 million in the prior-year period. The adjusted net income of $205.2 million increased from $181.9 million in 2Q19, reflecting the increase in adjusted operating income coupled with a one-time tax benefit of $11.8 million related to resolution of foreign uncertain tax positions.
  • Year-to-date reported net income of $31.2 million compared to a reported net loss of $972.7 million in the prior-year, while the adjusted net income of $255.7 million decreased 3% due tax benefits which were $18 million higher on a net basis in the prior year.
Earnings Per Share (EPS):
  • 2Q20 reported loss per share of $(0.03) improved from $(1.28) in the prior year period. The adjusted EPS of $0.27 increased year-over-year due to the aforementioned increase in adjusted net income and a $0.015 EPS contribution from the one-time tax benefit.
  • Year-to-date reported earnings per share of $0.04 increased from $(1.30) in the prior-year, and the adjusted EPS of $0.34 is a penny below the prior year due to the prior-year's higher net tax benefit.
Operating Cash Flow:
  • In 2Q20, net cash provided by operating activities was $422.1 million, a $102.5 million increase from the prior year period. The operating cash flow was driven by strong underlying progress in reducing aging receivables and inventory. First half operating cash flow totaled $462.0 million, up $224.3 million from the prior year period, driven by an $88 million contribution from factoring, strong underlying working capital improvement and profit growth.
  • Our 2Q20 free cash flow of $363.5 million improved by $169.6 million from the prior year period, fueled by the operating cash flow increase and a $67.1 million decrease in capex. First half free cash flow of $317.0 million increased by $338.6 million from the prior year.
Dividend and Net Debt:
  • On February 5, 2020, Coty announced a dividend of $0.125 per share payable on March 27, 2020 to holders of record on February 18, 2019.
  • Net debt of $7,205.9 million on December 31, 2019 decreased by $160.2 million from the balance of $7,366.1 million on September 30, 2019. The net debt decline was driven by the free cash inflow of $363.5 million, partially offset by a negative FX impact of $102 million and dividend payment of $66.1 million.
  • This resulted in a last twelve months Net debt to adjusted EBITDA ratio of 5.3x, an improvement from the 5.5x reported ratio as of September 30, 2019.
Second Quarter Fiscal 2020 Business Review by Segment
Luxury
 
In 2Q20, reported Luxury net revenues of $1,016.5 million decreased by 0.1% versus the prior year. On a LFL basis, Luxury net revenues increased by 1.3% on a high base, fueled by growth in Travel Retail, ALMEA, and Europe. North America declined as a result of a very difficult comparison in the year-ago period following Hurricane-related shipment push-outs into 2Q19, as well as reduced holiday giftset activity as part of our effort to build a healthier business.
 
2Q20 results were supported by strength in Burberry, Gucci, Tiffany, Hugo Boss, and Lacoste, fueled by strong innovation. In particular, the launch of Tiffany & Love broadened the brand reach to both female and male fragrances, driving market share gains in our core markets. Our early stage expansion into luxury cosmetics continued to progress well, with Gucci lipstick gradually broadening its distribution, including a very successful launch in China in November 2019, setting the stage for the broadening of the cosmetics range in the coming quarters.
 
The teams have prepared a number of innovations which will be launched from Q3 onwards. In parallel, with a view to strengthen the quality of our business, we have been cutting low value sales since January, which will temporarily drive weak sell-in trends in Q3.
 
The Luxury division delivered reported operating income of $148.1 million, an increase of 30% vs. the prior-year period. 2Q20 adjusted operating income was $185.8 million, reflecting  solid 5% growth from the prior year. The 2Q20 adjusted operating margin was 18.3%, an increase of 90 bps versus 2Q19, driven by over 100 bps of gross margin expansion.

Consumer Beauty
2Q20 Consumer Beauty net revenues of $799.7 million declined 17.4% on a reported basis and declined 6.7% LFL.  Even as the global mass beauty market in tracked channels has weakened moderately in recent months to a decline of approximately 3-4%, global sell-out trends for our brands have continued to show gradual improvement, declining in the mid-single digits in recent months. On a sell-in basis, our Europe revenues declined moderately in Q2, reflecting the low single digit mass beauty market declines and gradual progress in our performance. In North America, revenues remain pressured by shelf space losses and some weakening in the mass beauty market. ALMEA sales continued to be pressured by our proactive decision to reduce sales to lower value channels in select countries in support of our gross margin expansion agenda, even as our sell-out in the region remained solid.
 
By category, net revenue in color cosmetics continued to decline high single digits. Within color cosmetics, we have  improved our underperformance relative to the overall category, supported by market share gains in some of our priority brands including Rimmel in the U.K., Max Factor in Germany, Sally Hansen in the U.S., and Cover Girl in Canada. In retail hair, revenues continued to decline low single digits. In body care and mass fragrances, revenues declined in total, though our core brands adidas and Bruno Banani drove sell-out growth. As we continued to be deliberate in our resource allocation, we concentrated our working media investments behind our priority brand and country combinations, with revenues in these priority businesses declining low single digits, in line with 1Q20.
 
Reported operating income in 2Q20 of $26.9 million increased compared to reported operating loss of $906.9 million in the prior year period. The 2Q20 adjusted operating income of $48.7 million decreased from $54.1 million in the prior year period. However, the adjusted operating margin increased 50 bps to 6.1%, as a solid increase in working media was more than offset by control of non-working media spending.


Professional Beauty
Professional Beauty 2Q20 net revenues of $528.8 million rose by 0.6%, with LFL increasing 2.2%. The quarter was driven by continued strength of ghd and low single digit growth in the hair brands. Europe grew in the quarter, largely driven by distribution gains of Nail products. ALMEA sales were relatively flat, and North America declined slightly, due to declines in Nail.
 
Professional Beauty reported operating income of $73.5 million decreased from $73.8 million in the prior year period, while adjusted operating income was relatively flat at $90.8 million. The Professional Beauty division adjusted operating margin of 17.2% declined 10 bps from prior period.
Second Quarter Fiscal 2020 Business Review by Geographic Region
 North America
  • North America net revenues of $635.0 million, or approximately 27% of total net revenues, declined 14.4% as reported and declined 6.3% LFL. The LFL performance continued to be impacted by ongoing mass beauty challenges and shelf space losses in Consumer Beauty, as well as very high comparables in the prior year in Luxury due to shipment timing.
 
Europe
  • Europe net revenues of $1,172.9 million, or approximately 50% of total net revenues, declined 2.4% on a reported basis, but increased 1.5% on a LFL basis. The LFL strength was driven by growth in Luxury, particularly Travel Retail, and Professional Beauty.
 
ALMEA
  • ALMEA net revenues of $537.1 million, or approximately 23% of total net revenues, decreased 5.3% as reported, and decreased 1.7% on a LFL basis. The LFL decline continued to be driven by proactive reduction in lower value channel Consumer Beauty sales in select countries as well as distributor negotiations in the Middle East and Latin America. Encouragingly, Luxury sales accelerated during 2Q20, benefiting from strong growth in China and distribution expansion of Gucci makeup.
Cash Flows
  • In 2Q20, net cash provided by operating activities was $422.1 million, a $102.5 million increase from the prior year period. The operating cash flow was driven by strong underlying progress in reducing aging receivables and inventory.
  • Our 2Q20 free cash flow of $363.5 million improved by $169.6 million from the prior year period, fueled by the operating cash flow increase and a $67.1 million decrease in capex.
  • In 2Q20, we distributed $67.1 million in cash dividends and issued 2.4 million shares as part of the dividend reinvestment program.
  • Net debt of $7,205.9 million on December 31, 2019 decreased by $160.2 million from the balance of $7,366.1 million on September 30, 2019, driven by the free cash inflow of $363.5 million, partially offset by a negative FX impact of $102 million and dividend payment of $66.1 million.
Other Company Developments
Today Coty announced its new sustainability strategy titled, “Beauty that Lasts”, with updated targets focusing on three pillars: people, products and planet. The sustainability strategy is part of the company’s Turnaround Plan to build a better business for all stakeholders while making a positive contribution towards achieving a more sustainable and equitable world. This strategy reinforces Coty’s continued support of the UN Global Compact Ten Principles which was announced five years ago.

Other company developments include:
  • On December 27, 2019, the Company paid a quarterly dividend of $0.125 per common share. The participation rate in the program totaled 65% in the quarter to receive the dividend 50% cash and 50% stock.
  • Effective January 1, 2020, Coty implemented its new organizational structure. As a result, the Company plans to start reporting its financial results under this new divisional structure as of 3Q FY20. 
  • On January 6, 2020, Coty completed the transaction to create a long-term strategic partnership with Kylie Jenner to jointly build and further develop Kylie's existing beauty business. Under the terms of the agreement, Coty acquired a 51% stake in the partnership for $600 million.
  • On February 5, 2020, Coty announced a dividend of $0.125, payable on March 27, 2020 to holders of record on February 18, 2020.
Conference Call
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, February 5, 2020 to discuss its results. The dial-in number for the call is (866) 834-4311 in the U.S. or (720) 405-2213 internationally (conference passcode number: 1766567). The live audio webcast and presentation slides will be available at https://investors.coty.com. The conference call will be available for replay.
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