NEW YORK - May 9, 2022-- Coty Inc. (NYSE: COTY) ("Coty" or "the Company") today announced its results for the third quarter of fiscal year 2022, ended March 31, 2022. The Company delivered another quarter of solid financial progress and continued strong execution across its strategic growth pillars.
In Q3, Coty's sales increased 15% as reported and 19% on an LFL basis, ahead of its prior guidance of mid-teens LFL growth. Sales were driven by strong results in both Prestige and Consumer Beauty, with overall revenue growth inline with sell-out performance. Geographically, revenue growth was fueled by the continued recovery in many EMEA markets, a strong rebound in Travel Retail, and continued momentum in the U.S. E-commerce maintained its momentum, with double digits e-commerce sales growth in Q3 and YTD, supporting high teens e-commerce penetration, even as stores re-opened.
Coty's Prestige segment reported very robust sales growth of 21% versus the prior year and 25% on a LFL basis, even as reductions in value distribution had a low single digit negative impact on growth. Prestige fragrance sales continued to accelerate, increasing over 20% in Q3, with particularly strong growth from Gucci Beauty, Chloe, Burberry, and Hugo Boss. This was driven by the continued in-market success of Coty's Q1 fragrance innovations, Gucci Flora Gorgeous Gardenia and Burberry Hero, combined with the success of Q3 launches of Hugo Boss The Scent Le Parfum and Burberry Her EDT. The two strong female fragrance launches this fiscal year demonstrate clear progress on Coty's strategy to further elevate its position in the large female fragrance market. Prestige cosmetics nearly doubled YoY in both Q3 and fiscal year-to-date, led by the continued momentum of Gucci Beauty, as well as solid performances by both Burberry and Kylie Cosmetics.
Consumer Beauty revenues increased 8% as reported and 10% LFL in Q3, with strong performance across color cosmetics, mass fragrances, and body care. While the global mass beauty market was moderately positive in the quarter, Coty continued to outperform the market and grow share on a global basis for the past 5 consecutive months. Rimmel delivered market share gains across its key geographies, driven by the success of the Kind & Free cosmetics range. Max factor, Sally Hansen and CoverGirl also recorded share gains, although temporary supply constraints on CoverGirl’s Clean mascara have weighed on the brands more recent share performance. In addition, the recent re-positioning of Bourjois in its home market, France, has seen strong initial success, with the brand's growth outpacing the category by ~4x in March, and becoming the #1 mascara in the very competitive French market.
Despite the challenged inflationary environment, Coty continued to generate strong gross margin expansion in the quarter, while also maintaining an increased level of media investment to further fuel revenue and sell-out growth. In Q3, reported gross margins expanded by 240 bps YoY to 64.3%, while adjusted gross margin grew 240 bps YoY to 64.6%. This brings Coty's year-to-date reported gross margin to 64.0% and adjusted gross margin to 64.2%, a robust expansion of 450 bps YoY, even as inflationary headwinds worsened from less than 1% of net revenues in 1H22 to ~1.5% of revenues in Q3. This substantial gross margin expansion was driven by favorable product and category mix, pricing, and higher volumes. Coty delivered Q3 reported operating income of $57.1 million and adjusted EBITDA of $182.5 million. Year-to-date adjusted EBITDA totaled $772.9 million, reflecting 22% growth YoY.
Financial Net Debt improved by over $200 million to $4.2 billion at the end of Q3, fueled by the $210 million Wella shareholder distribution and the remaining cash proceeds from real estate sales. In the seasonally weak Q3 period, Coty's free cash flow was only modestly negative, aided by one time benefits as the Company exited the Wella TSA. As a result, the financial leverage ratio of 4.7x exiting Q3 improved sequentially from the 4.9x at the end of Q2. During Q3, Coty's retained 26% Wella stake was adjusted lower by $210M million to reflect the Wella distribution during the quarter, while its fair value increased by $61 million as a result of stronger results and outlook. As a result, Coty's Wella stake was valued at approximately $1.03 billion at quarter-end, with the Company's Economic Net Debt totaled approximately $3.2 billion.
Commenting on the operating results, Sue Y. Nabi, Coty's CEO, said:
"Our Q3 earnings mark the seventh consecutive quarter of Coty reporting results inline to ahead of expectations. I am extremely proud of the organization for delivering these results, and outperforming the overall beauty market, in an increasingly volatile environment. This confirms that Coty has the brands and the people to win in the beauty market, guided by our strategic priorities of delivering above-market sales growth and expanding gross margin, allowing for brand reinvestment, profit expansion and continued deleveraging.
Our market-leading Q3 LFL sales growth in both Prestige and Consumer Beauty confirm that our decision to step up media investment during Q2 has proven to be the right one. Importantly, our gross margins also showed solid expansion during the quarter, allowing us to maintain a strong level of media investment, while also delivering significant profit performance. The success of the virtuous cycle we have created is even more evident when looking at our year-to-date results, and the strong growth we are delivering across sales, gross margin, media investments, and profitability. I am also pleased to say that Q3 marks another quarter of improvement on debt reduction and free cash flow, with our leverage now at 4.7x and well on track to drive our leverage towards 4x by end of CY22.
During Q3, we continued to execute on each of our strategic pillars. I am pleased to say that our Consumer Beauty business continued to gain market share globally for the 5th consecutive month, a milestone that this business had not achieved in the previous 5 years. Underpinning this market share momentum is our phased approach to brand repositioning, which began with CoverGirl last spring, followed by Rimmel and Max Factor last fall, and most recently Bourjois that has delivered very strong initial results in France. We are also excited by the plans in place for adidas, whose repositioning is on track for late summer 2022.
We maintained outstanding trends within our Prestige fragrance business, even as we further reduced low quality sales, as consumers globally continue to gravitate towards the fragrance category, and our recent innovations continued to resonate with consumers. Meanwhile, we are as confident as ever regarding our expansion into prestige cosmetics, as Gucci Beauty, Burberry, and Kylie continue to deliver great results with plenty of room ahead to further build out both distribution and the product portfolios.
In parallel, we continued to progress in building out our skincare footprint, our third strategic pillar. I am very pleased to say that Lancaster had an outstanding quarter in both Hainan and mainland China, with Lancaster's iconic 365 Serum resonating with Chinese consumers and rapidly becoming the hero SKU in the portfolio. At the same time, we are continuing to build awareness for CoverGirl's first-ever entry into skincare. With only five SKUs launched thus far and in-store placement in the cosmetics wall, we are continuing to fine-tune the execution and see lots of opportunity for this range.
Our momentum across Digital - our fourth strategic pillar - continued to build, including double digit e-commerce sales growth, global momentum in brand livestreaming and social commerce, viral activations on TikTok, and the initial deployment of virtual try-on capabilities across markets. We also saw strong performance on our fifth pillar, China, during January and February, though the onset of COVID-related restrictions has weighed on the business exiting March. Importantly, Coty's Prestige business was once again the fastest growing amongst the leading prestige beauty companies in China, with double-digit sell-out growth in a flat market backdrop.
As we enter the final two months of FY22, the environment remains highly dynamic. Coty is benefiting from several category and market tailwinds led by fragrances, though at the same time, we and the industry face lockdowns in China, the war in Ukraine, inflationary headwinds, and global supply pressures. What is clear is that Coty has navigated this complex backdrop very successfully thus far. We have continued the premiumization of our portfolios in both Prestige and Consumer Beauty, to implement price increases as a means of retaining talent and protecting margins, while also maintaining the necessary flexibility in our supply chain. The strong year-to-date performance on revenues, profit and EPS allow us to confidently confirm our FY22 guidance and even raise our FY22 adjusted EPS outlook to $0.23-0.27.
We remain confident in our short-term and medium-term ambitions, as we continue to strengthen our position as a true global beauty powerhouse."
*Adjusted financial metrics used in this release are non-GAAP. See reconciliations of GAAP results to Adjusted results in the accompanying tables.
1Based on fair market value, reflecting the Wella capital structure as of December 31, 2021
E-commerce revenues and penetration cover the vast majority of Coty’s markets and exclude certain markets like Travel Retail in EMEA and Americas. Additionally, the data includes estimated data for Brick and Click sales, which may be subject to change.