Coty Reports Strong 2Q22 Across All Metrics, With Significant Momentum Into 3Q22

FY22 Sales Expected at Upper End of Guidance Range, with Adjusted EPS Outlook Higher
 

NEW YORK - February 8, 2022-- Coty Inc. (NYSE: COTY) ("Coty" or "the Company") today announced its results for the second quarter of fiscal year 2022, ended December 31, 2021. The results represented another quarter of solid financial improvement and continued strong delivery across its strategic growth pillars.
 

In Q2, Coty's sales increased 12% as reported and LFL, in-line with its prior guidance of low-teens LFL growth year-on-year, following the strong sales growth during Q1 as Coty shipped key launches including Gucci Flora Gorgeous Gardenia, Burberry Hero and the relaunch of the full Kylie Cosmetics range. With each of these launches strongly resonating in-market and the Consumer Beauty business gaining sales growth momentum and market share, the overall Coty sell-out improved in Q2. As a result, both sales and sell-out in 1H22 saw mid-teens growth, with January LFL sales accelerating from Q2 levels to +13%.
 

Coty's Prestige segment generated solid 12% reported and LFL growth in Q2, and 21% in 1H22. Prestige fragrance sales continued to grow at a double-digit pace in Q2, with nearly all brands contributing, particularly Gucci, Burberry, Chloe, and Hugo Boss. Encouragingly, Coty's key launches saw strong in-market success, with Gucci Flora Gorgeous Gardenia and Burberry Hero among the top launches in the U.S. market and in China, including on Tmall. Simultaneously, Prestige cosmetics sales nearly doubled in 1H22, led by global momentum in Gucci makeup and the continued expansion of Kylie Cosmetics following the relaunch over the summer. Regionally, the 1H22 performance was largely broad based as the U.S. and China delivered double digit growth, Travel Retail more than doubled, and many European markets continued to recover.
 

Consumer Beauty revenues increased 11% as reported and 12% LFL in Q2, and grew by 8% as reported and LFL in 1H22. The early success of Coty's strategy to stabilize and grow its Consumer Beauty business is evident in the latest measured market share data, in which, Coty grew its market share on a global basis for the first time in 5 years. This was underpinned by market share gains across all 4 key color cosmetics brands - CoverGirl, Rimmel, Sally Hansen and Max Factor - as the new brand equities, communications, and product launches resonated with consumers.
 

During the quarter, Coty's virtuous circle continued to take hold with significant gross margin expansion and further cost reductions allowing the Company to grow profit while simultaneously reinvesting in media to fuel sell-out growth. Q2 reported gross margins expanded by 570 bps YoY to 64.4%, while adjusted gross margin grew 590 bps YoY and 120bps QoQ to 64.6%, despite inflationary headwinds. This robust gross margin expansion was driven by favorable product and category mix, pricing, improved excess & obsolescence, and higher absorption. In addition, Coty continued to lower its cost base, with year-over-year savings of over $40 million in Q2, bringing total YTD savings to close to $100M. Coty delivered Q2 reported operating income of $244.0 million and adjusted EBITDA of $311.9 million. 1H22 reported operating income totaled $261.2 million and adjusted EBITDA totaled $590.4 million, reflecting over 30% growth YoY, ahead of guidance.
 

Financial Net Debt improved by approximately $500 million to just under $4.5 billion at the end of Q2, fueled by strong free cash flow generation and real estate divestitures. As a result, the financial leverage ratio of 4.9x at the end of CY21 was ahead of expectations. With an increase in the value of Coty's 26% Wella stake to approximately $1.18 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:
 

"With our 1H22 now complete, I am very pleased to say that the year is shaping up as we had hoped, and in many respects even better. During the quarter, we continued to execute on our strategic growth pillars, allowing us to deliver sales, profit, and leverage results inline or ahead of guidance for the sixth consecutive quarter. The second quarter, and even more so the first half, further illustrates the virtuous cycle we have created. Strong topline growth combined with gross margin expansion and strong cost execution are generating both profit growth and re-investment in the business in the most promising opportunities. This combination has contributed to sequentially improving sell-out trends in Q2, which sets the stage for accelerating sales growth in the second half. Importantly, we also delivered on our leverage target goals, ending CY21 with financial net debt to adjusted EBITDA leverage ratio of below 5x and we are already making strong strides toward our CY22 leverage target of approximately 4x with the expected $175 million of shareholder distribution from Wella.
 

Q2 marked another quarter of progress across each of our six strategic pillars. I am extremely proud to say that the repositioning of Consumer Beauty brands is generating success. For the first time in 5 years, all 4 of our top cosmetics brands - CoverGirl, Rimmel, Sally Hansen, and Max Factor - are gaining market share on a global basis, fueling market share gains for the overall Consumer Beauty business. While the path to sustained Consumer Beauty expansion may not be linear, these strong results confirm that our Consumer Beauty brands are as relevant as ever and with the right products, communication strategy, in-store execution and teams, we can truly excel.
 

Trends within our Prestige fragrance portfolio remained strong, with double digit sell-out growth and strategic launches like Gucci Flora and Burberry Hero already on track to become global icons. At the same time, the success of Gucci makeup and continued expansion of Kylie cosmetics are further cementing Coty's position within prestige cosmetics. Meanwhile, Q2 was a busy quarter in relation to our skincare ambitions, as we announced the license of the Orveda brand and the launch of CoverGirl skincare, and hired Dr. Shimei Fan as our Chief Scientific Officer, all while solidifying Lancaster's position in China through new door openings and innovative activations. In digital, we are leading with social commerce across each region, fueling a truly omnichannel approach with our retailer partners. In China, we have maintained double digit growth, even as COVID restrictions weighed on market growth in the short term, with our Prestige sell-out growth 6 times higher than the prestige beauty market. Finally, on sustainability, we completed a comprehensive footprint analysis ex-Wella, which will serve as the baseline for more ambitious sustainability targets in line with the Science Based Target initiative.
 

The strong business trajectory of the first half of the year and continuing through January gives us confidence in our outlook for the second half of FY22. Therefore, we now expect our FY22 LFL sales growth to be towards the higher end of our guidance range of low-to-mid teens LFL growth. We continue to anticipate the impact of inflation to step up in the second half of FY22, and we expect to fully offset this through a combination of mix management, pricing, and cost savings. As we navigate through this dynamic environment, we remain confident in achieving FY22 constant currency adjusted EBITDA of $900 million at a minimum, while increasing our adjusted EPS outlook to $0.22-0.26.
 

Our short term and medium-term ambitions remain fully on track, as we continue to transform Coty into a true global beauty powerhouse."
 

The strong sales and sell-out momentum in 1H22, extending through January with LFL sales growth of +13%, reinforces Coty's confidence that FY22 LFL sales will be at the upper end of its guidance range of low-to-mid teens percentage growth. Based on current FX rates, Coty expects a headwind of 3-4% to its reported sales in 2H22.
 

The Company continues to expect FY22 adjusted of EBITDA of $900 million at a minimum, on a constant currency basis, as Coty navigates the inflationary environment while intentionally reinvesting gross margin gains and costs savings in its brands to maximize value and fuel sustained topline growth. This reflects strong EBITDA margin expansion YoY. Based on current FX rates, Coty expects a negligible FX impact to its FY22 adjusted EBITDA outlook, as FX benefits in 1H22 are offset by FX headwinds in 2H22.
 

With the strong Q2 EPS delivery, Coty raises its FY22 adjusted EPS guidance to $0.22-0.26, up from its previously guided range of $0.20-0.24. The FY22 adjusted EPS guidance includes approximately 1 cent of net discrete tax benefits expected for the year.
 

In addition, the Company continues to target leverage of approximately 4x exiting CY22. Given Wella has completed a refinancing of its existing debt in order to fund a shareholder distribution, the expected $175 million distribution from Wella represents a strong contribution towards this target. Coty continues to target leverage of approximately 2x exiting CY25.

Refer to “Non-GAAP Financial Measures” for discussion of the non-GAAP financial measures used in this release; reconciliations from reported to adjusted results can be found at the end of this release.
 

Revenues:
 

Gross Margin:
 

Operating Income and EBITDA:
 

Net Income:
 

Earnings Per Share (EPS) - diluted:
 

Operating Cash Flow:
 

Financial Net Debt:
 

Prestige
 

In 2Q22, Prestige net revenues of $1,008.0 million or 64% of Coty sales, increased by 12% versus the prior year. On a LFL basis, Prestige net revenues delivered robust growth of 12%, driven by strength across all regions including continued rebound of market growth in most EMEA markets, Travel Retail, China, and the U.S.
 

During 2Q, U.S. Prestige fragrance sell-out continued to generate stellar growth, increasing over 40% versus last year. Performance continued to be particularly favorable for Burberry, Gucci, Marc Jacobs, and Chloe. Importantly, Coty's recent key innovations, notably Gucci Flora Gorgeous Gardenia and Burberry Hero, also continue to deliver very strong sell-out performance and are amongst the top selling fragrance innovations in key markets. In EMEA, Prestige fragrances showed further improvement in 2Q22. In China, fragrance sell-out showed strong double-digit growth in the quarter, which was supported by the strength of recent launches, including Gucci Flora Gorgeous Gardenia which ranked as a top 7 fragrance on Tmall in December.
 

Additionally, Coty continued to make progress further expanding into Prestige cosmetics and skincare in the quarter. Prestige cosmetics sales nearly doubled in both Q2 and 1H22, fueled by Gucci makeup and Kylie cosmetics. In skincare, the Company continued to build the foundations for acceleration in the segment, including strengthening Lancaster's brand image in Hainan and mainland China through innovative activations and continued distribution expansion.
 

The Prestige segment generated a reported operating income of $141.6 million in 2Q22, compared to $110.8 million in the prior year. The 2Q22 adjusted operating income was $182.0 million, up from an adjusted operating income of $160.6 million in the prior year, driven by gross margin improvement, partially offset by higher working media expenses. Adjusted EBITDA for the Prestige segment rose to $219.0 million from $199.4 million in the prior year, with a margin of 21.7%.
 

Consumer Beauty
 

In 2Q22, Consumer Beauty net revenues of $570.2 million, or 36% of Coty sales, increased by 11% versus the prior year. On a LFL basis, Consumer Beauty net revenue growth accelerated to 12%. Encouragingly, all regions generated double-digit LFL growth in the quarter. From a category perspective, color cosmetics led, with LFL growth in the mid-teens.
 

During the quarter, for the first time in 5 years the total Coty Consumer Beauty business gained market share, driven by particularly strong performance of color cosmetics, which grew in share by over 1 point. In the U.S., CoverGirl continues to show that the brand is on a sustainable path of improvement and growth as it has grown or maintained share in 6 of the last 9 months since the new brand equity was launched. Meanwhile, Sally Hansen remains strong as it gained share through the quarter and sell-out remains ahead of pre-pandemic levels.
 

In Europe, Coty grew market share for the first time in two years, which was supported by the re-positioning efforts behind Rimmel and Max Factor. In the UK, Rimmel continues to lead the market with share increasing, supported by particularly strong e-commerce trends. Meanwhile, Max Factor continued to take share across many key markets including the UK, Spain, Czech Republic, and Poland.
 

The Consumer Beauty reported operating income was $43.3 million in 2Q22, an increase from $30.4 million in the prior year. The 2Q22 adjusted operating income of $54.3 million increased from $42.4 million in the prior year, driven by a higher gross margin and solid fixed cost reductions, partially offset by a reinvestment in marketing expenses, particularly towards working media. During the quarter, adjusted EBITDA increased to $92.9 million from $85.1 million in the prior year, with a margin of 16.3%.

Americas
 

EMEA
 

Asia Pacific
 

Other noteworthy company developments include:
 

Certain statements in this Earnings Release are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's current views with respect to, among other things, the impact of COVID-19 and potential recovery scenarios, the Company’s comprehensive transformation agenda (the “Transformation Plan”), strategic planning, targets, segment reporting and outlook for future reporting periods (including the extent and timing of revenue, expense and profit trends and changes in operating cash flows and cash flows from operating activities and investing activities), the impact of the Wella divestiture and the related transition services (the “Wella TSA”), the Company’s future operations and strategy (including the expected implementation and related impact of its strategic priorities), ongoing and future cost efficiency, optimization and restructuring initiatives and programs, strategic transactions (including their expected timing and impact), the Company’s capital allocation strategy and payment of dividends (including suspension of dividend payments and the duration thereof and any plans to resume cash dividends or to continue to pay dividends in cash on preferred stock), investments, licenses and portfolio changes, product launches, relaunches or rebranding (including the expected timing or impact thereof), synergies, savings, performance, cost, timing and integration of acquisitions, including the strategic partnerships with Kylie Jenner and Kim Kardashian West, future cash flows, liquidity and borrowing capacity (including any refinancing or deleveraging activities), timing and size of cash outflows and debt deleveraging, the timing and extent of any future impairments, and synergies, savings, impact, cost, timing and implementation of the Company’s Transformation Plan, including operational and organizational structure changes, operational execution and simplification initiatives, fixed cost reductions, supply chain changes, e-commerce and digital initiatives, the expected impact of global supply chain challenges or inflationary pressures, and the priorities of senior management. These forward-looking statements are generally identified by words or phrases, such as “anticipate”, “are going to”, “estimate”, “plan”, “project”, “expect”, “believe”, “intend”, “foresee”, “forecast”, “will”, “may”, “should”, “outlook”, “continue”, “temporary”, “target”, “aim”, “potential”, “goal” and similar words or phrases. These statements are based on certain assumptions and estimates that we consider reasonable, but are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual events or results (including our financial condition, results of operations, cash flows and prospects) to differ materially from such statements, including risks and uncertainties relating to:
 

When used herein, the term “includes” and “including” means, unless the context otherwise indicates, “including without limitation”. More information about potential risks and uncertainties that could affect the Company’s business and financial results is included under the heading “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2021 and annual report on Form 10-K for the year ended June 30, 2021 and other periodic reports the Company has filed and may file with the SEC from time to time.
 

All forward-looking statements made in this release are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this release, and the Company does not undertake any obligation, other than as may be required by applicable law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
 

Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such, and should only be viewed as historical data.

The Company operates on a global basis, with the majority of net revenues generated outside of the U.S. Accordingly, fluctuations in foreign currency exchange rates can affect results of operations. Therefore, to supplement financial results presented in accordance with GAAP, certain financial information is presented excluding the impact of foreign currency exchange translations to provide a framework for assessing how the underlying businesses performed excluding the impact of foreign currency exchange translations (“constant currency”). Constant currency information compares results between periods as if exchange rates had remained constant period-over-period, with the current period’s results calculated at the prior-year period’s rates. The Company calculates constant currency information by translating current and prior-period results for entities reporting in currencies other than U.S. dollars into U.S. dollars using constant foreign currency exchange rates. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies. The Company discloses the following constant currency financial measures: net revenues, organic like-for-like (LFL) net revenues, adjusted gross profit and adjusted operating income.
 

The Company presents period-over-period comparisons of net revenues on a constant currency basis as well as on an organic (LFL) basis. The Company believes that organic (LFL) better enables management and investors to analyze and compare the Company's net revenues performance from period to period. For the periods described in this release, the term “like-for-like” describes the Company's core operating performance, excluding the financial impact of (i) acquired brands or businesses in the current year period until we have twelve months of comparable financial results, (ii) the divested brands or businesses or early terminated brands, generally, in the prior year non-comparable periods, to maintain comparable financial results with the current fiscal year period and (iii) foreign currency exchange translations to the extent applicable. For a reconciliation of organic (LFL) period-over-period, see the table entitled “Reconciliation of Reported Net Revenues to Like-For-Like Net Revenues”.
 

The Company presents operating income, operating income margin, gross profit, gross margin, effective tax rate, net income, net income margin, net revenues, EBITDA, and EPS (diluted) on a non-GAAP basis and specifies that these measures are non-GAAP by using the term “adjusted” (collectively the Adjusted Performance Measures). The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies, including companies in the beauty industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
 

Adjusted operating income/Adjusted EBITDA from continuing operations excludes restructuring costs and business structure realignment programs, amortization, acquisition- and divestiture-related costs and acquisition accounting impacts, stock-based compensation, and asset impairment charges and other adjustments as described below. For adjusted EBITDA, in addition to the preceding, we exclude the adjusted depreciation as defined below. We do not consider these items to be reflective of our core operating performance due to the variability of such items from period-to-period in terms of size, nature and significance. They are primarily incurred to realign our operating structure and integrate new acquisitions, and exclude divestitures, and fluctuate based on specific facts and circumstances. Additionally, Adjusted net income attributable to Coty Inc. and Adjusted net income attributable to Coty Inc. per common share are adjusted for certain interest and other (income) expense and deemed preferred stock dividends, as described below, and the related tax effects of each of the items used to derive Adjusted net income as such charges are not used by our management in assessing our operating performance period-to-period.
 

Adjusted Performance Measures reflect adjustments based on the following items:
 

The Company has provided a quantitative reconciliation of the difference between the non-GAAP financial measures and the financial measures calculated and reported in accordance with GAAP. For a reconciliation of adjusted gross profit to gross profit, adjusted EPS (diluted) to EPS (diluted), and adjusted net revenues to net revenues, see the table entitled “Reconciliation of Reported to Adjusted Results for the Consolidated Statements of Operations.” For a reconciliation of adjusted operating income to operating income and adjusted operating income margin to operating income margin, see the tables entitled “Reconciliation of Reported Operating Income (Loss) to Adjusted Operating Income” and "Reconciliation of Reported Operating Income (Loss) to Adjusted Operating Income by Segment." For a reconciliation of adjusted effective tax rate to effective tax rate, see the table entitled “Reconciliation of Reported Income (Loss) Before Income Taxes and Effective Tax Rates to Adjusted Income Before Income Taxes and Adjusted Effective Tax Rates.” For a reconciliation of adjusted net income and adjusted net income margin to net income (loss), see the table entitled “Reconciliation of Reported Net Income (Loss) to Adjusted Net Income.”
 

The Company also presents free cash flow, adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA"), immediate liquidity, Financial Net Debt and Economic Net Debt. Management believes that these measures are useful for investors because it provides them with an important perspective on the cash available for debt repayment and other strategic measures and provides them with the same measures that management uses as the basis for making resource allocation decisions. Free cash flow is defined as net cash provided by operating activities less capital expenditures; adjusted EBITDA is defined as adjusted operating income, excluding adjusted depreciation and non-cash stock-based compensation. Net debt or Financial Net Debt (which the Company referred to as "net debt" in prior reporting periods) is defined as total debt less cash and cash equivalents, and Economic Net Debt is defined as total debt less cash and cash equivalents less the value of the Wella Stake. For a reconciliation of Free Cash Flow, see the table entitled “Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow,” for adjusted EBITDA, see the table entitled “Reconciliation of Adjusted Operating Income to Adjusted EBITDA” and for Financial Net Debt and Economic Net Debt, see the tables entitled “Reconciliation of Total Debt to Financial Net Debt and Economic Net Debt.” Further, our immediate liquidity is defined as the sum of available cash and cash equivalents and available borrowings under our Revolving Credit Facility (please see table "Immediate Liquidity").
 

These non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP.
 

To the extent that the Company provides guidance, it does so only on a non-GAAP basis and does not provide reconciliations of such forward-looking non-GAAP measures to GAAP due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation, including adjustments that could be made for restructuring, integration and acquisition-related expenses, amortization expenses, non-cash stock-based compensation, adjustments to inventory, and other charges reflected in our reconciliation of historic numbers, the amount of which, based on historical experience, could be significant.