Improved Operational Results Driven by Better Sales Trends Across All Coty Core Regions in both its Prestige and Mass Businesses
Wella Divestiture Expected to Close as Planned by End of CY20, Which Will Result in Significant Net Debt Reduction
NEW YORK–(BUSINESS WIRE)–Coty Inc. (NYSE: COTY) today announced significantly improved financial results for the first quarter of fiscal year 2021, ended September 30, 2020.
Since the previous quarter, net revenues improved each month, resulting in a 19% LFL decline for Coty’s Continuing Operations, an improvement of over 40 percentage points as compared to the change in net revenues from Continuing Operations in the previous quarter. Fixed costs savings were approximately $80 million in 1Q21, and are on track to deliver over $200 million of savings in FY21, while still maintaining focused marketing investments. The operational improvements and stringent cost controls resulted in $81.1 million in adjusted operating income from Continuing Operations, an increase of 24% versus last year. Total Coty adjusted EPS, which includes Wella, grew 57% to $0.11 for the quarter, while reported EPS was $0.24.
The Wella divestiture is expected to close as planned by the end of CY20, which – together with positive cash flow in 2Q21 – will lower the Financial Net Debt from $7.9 billion today to around $5.0 billion. Taking into account the retained 40% Wella stake (worth $1.3 billion), the Economic Net Debt will stand below $4.0 billion.
Against this backdrop, Coty has made substantive progress on its key priorities including innovation and performance in both prestige and mass channels, strengthened positioning in its core markets, stronger e-commerce momentum and presence, and growth from its footholds in both skincare and in China. With its early progress, Coty is strengthening its brands and reinforcing their connection with consumers around the world.
Commenting on the operating results, Sue Y. Nabi, Coty’s CEO, said:
“Our first quarter results are a testament that a stronger, more focused and more flexible Coty, is emerging in the middle of the COVID-19 pandemic and better prepared to face any future market disruptions. Impressively, the organization has continued to adapt to the new normal, executing on our financial and operational priorities, including profit and cash flow protection, strong innovation performance, e-commerce momentum, and strengthened positioning in core markets.
Our results met or exceeded our expectations by all measures, showing significant improvement from 4Q20 across all of our regions, and across our prestige and mass businesses. Our stringent cost control enabled over 20% growth in our adjusted operating income and over 50% growth of the total company EPS.
The success of our recent launches, including Marc Jacobs Perfect, Gucci’s Bloom Profumo di Fiori, Sally Hansen’s good.kind.pure, and CoverGirl’s Clean Fresh, confirm the strength and enduring potential of our brand portfolio. As we have leaned into our digital efforts and activation, we have seen double-to-triple digit e-commerce sell-out growth across most markets, with our e-commerce penetration as a percentage of our overall sales doubling to 13%. As a result, we have strengthened our positions in our core markets, gaining market share in prestige fragrances across the U.S., U.K, and Germany, and stabilizing our mass color cosmetics market share in the U.S. These milestones, along with the strengthening of our executive leadership team with Isabelle Bonfanti as Chief Commercial Officer of Luxury and Jean-Denis Mariani as Chief Digital Officer, put us well on the path to the new, future Coty.
We remain focused on diligent cost control and delivering on our FY21 financial commitments, including being profitable on an adjusted operating income basis for Continuing Operations and being cash positive for the year, supporting improved like-for-like Financial Net Debt.
More than ever, Coty is committed to reigniting our mass color cosmetics business, especially CoverGirl. Likewise, we will accelerate Coty’s prestige business growth through makeup by leveraging our designer brands portfolio, including Gucci and Burberry, especially in Asia. We will continue building further growth engines, leveraging the potential of our skincare brands powered by our new DTC capabilities, starting with Kylie skincare.
After several months in the CEO role, I am as convinced as ever that we’ve put in place the right foundations to unleash Coty’s huge potential. Coty is now ready to grow in all core regions, categories and price positions across the market.”
- Improving sales trends across all core regions and channels, driven by innovation product launches and e-commerce momentum
- 1Q21 Continuing Operations net revenues, which exclude Wella, declined 20% as reported and 19% LFL, with further sales trend improvement in October
- Continuing Operations reported operating loss of $66.0 million
- Strong growth in 1Q21 Continuing Operations adjusted operating income of $81.1 million, up 24%
- Good progress with approximately $80 million fixed cost reductions and very focused marketing investments; on-track to deliver over $200 million of cost savings in FY21
- 1Q21 free cash outflow of $28.3 million was ahead of internal expectations, despite the impact of delayed payments from 4Q20, fueled by profit growth and strong efforts on overdues collection
- Financial Net Debt stable at $7,864.5 million. Wella proceeds and residual value of Wella stake to underpin expected Economic Net Debt below $4.0 billion post closing
- Coty targets Financial Net Debt to EBITDA ~5x by end of Calendar 21 (3.5x Economic Net debt), with a medium term leverage target of < 3x Financial Net Debt to EBITDA
- Significant immediate liquidity of $1,721.7 million at end-quarter
Note: Discussions of “Total Coty” results reflect the current full scope of Coty’s revenues and costs; “Continuing Operations” results reflect Total Coty results less the revenues and directly attributable costs of the soon-to-be-divested Wella business; “Ongoing Coty” results reflect Continuing Operations plus a partial cost recovery expected under the Wella transitional service agreement (the “Wella TSA”) which the Company believes is useful information to investors to analyze the balance of costs for the ongoing business.
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.
- 1Q21 reported net revenues of $1,690.5 million decreased 13.0% year-over-year, with negligible FX impact. Like-for-like (LFL) revenue decreased 11.8%, driven by LFL decreases in the Asia Pacific segment of 36.6%, EMEA of 24.4%, and Americas of 4.5%, while Wella rose 6.5%.
- 1Q21 reported and adjusted gross margin of 61.8% decreased from 62.0% in the prior-year period, primarily due to the decline in sales volume as well as mix impact, including a higher proportion of sales coming from mass brands and the Brazil market which was impacted by FX depreciation, partially offset by a higher gross margin at Wella.
- 1Q21 reported operating income of $79.4 million declined from $126.0 million due to lower sales, reduced gross profit, as well as acquisition and divestiture related expenses of $46.3 million, and restructuring and other business realignment costs of $35.4 million. This was partially offset by lower media investments and fixed cost expenses, as well as strong operating income growth at Wella due to its increase in sales and gross margin, as well as no depreciation and amortization costs recorded for Wella as a ‘held for sale’ asset.
- 1Q21 adjusted operating income of $226.5 million increased 46% from $154.7 million in the prior year. The increase was driven by strong fixed cost reductions across both people and non-people costs, combined with active management of marketing investments, and the aforementioned operating income growth at Wella. For 1Q21, the adjusted operating margin increased to 13.4% from 8.0% in the prior year.
- 1Q21 reported net income of $200.6 million improved from a reported net income of $52.3 million in the prior year, aided by reported tax benefits associated with Coty’s relocation of its tax principal.
- The 1Q21 adjusted net income totaled $83.6 million versus adjusted net income of $50.5 million in the prior year.
Earnings Per Share (EPS) – diluted:
- 1Q21 reported income per share of $0.26 improved from $0.07 in the prior year.
- 1Q21 adjusted EPS of $0.11 increased from $0.07 in the prior year.
Operating Cash Flow:
- 1Q21 cash from operations totaled $42.6 million compared to $39.9 million in the prior-year period, reflecting an increase in net income on a cash basis.
- 1Q21 free cash outflow of $28.3 million declined from a free cash outflow of $46.5 million in the prior year driven by the operating cash flow increase coupled with a $15.5 million reduction in capex.
Financial Net Debt:
- Financial Net Debt of $7,864.5 million on September 30, 2020 was largely flat with the balance of $7,848.0 million on June 30, 2020.
- Coty ended the year with $535.7 million in cash and cash equivalents, and immediate liquidity of $1,721.7 million.
- 1Q21 reported net revenues of $1,124.1 million decreased 20.3% year-over-year, with negligible FX impact. LFL revenue decreased 18.9%, driven by LFL decreases in the Asia Pacific segment of 36.6%, EMEA of 24.4%, and Americas of 4.5%. By channel, the mass business decline moderated to 10.1% from a 48% decline in the prior quarter, and the prestige business declined 25.0%, significantly improving from -73% in the prior quarter, as stores re-opened and the industry saw better alignment between sell-in and sell-out.
- 1Q21 reported and adjusted gross margin of 58.6% decreased from 60.2% in the prior-year period, primarily due to the decline in sales volume as well as mix impact, including a higher proportion of sales coming from mass brands and the Brazil market which was impacted by FX depreciation.
- 1Q21 reported operating loss from Continuing Operations of $66.0 million declined from reported operating income of $64.0 million due to lower sales, reduced gross profit, as well as acquisition and divestiture related expenses of $46.3 million, and restructuring and other business realignment costs of $35.4 million, partially offset by lower media investments and fixed cost expenses.
- 1Q21 adjusted operating income for Continuing Operations of $81.1 million increased 24% from $65.4 million in the prior year. The increase was driven by strong fixed cost reductions across both people and non-people costs, combined with active management of marketing investments. For 1Q21, the adjusted operating margin for Continuing Operations increased 260 bps to 7.2%, despite the overhang from stranded costs.
- Including the expected income under the Wella TSA, the 1Q21 adjusted operating income for Ongoing Coty of $93 million increased from $77 million in the prior year period.
- 1Q21 reported net income of $116.7 million improved from $12.8 million in the prior year, aided by reported tax benefits associated with Coty’s relocation of its tax principal.
- The 1Q21 adjusted net loss of $15.9 million compared to adjusted net loss of $7.5 million in the prior year period.
Earnings Per Share (EPS) – diluted:
- 1Q21 reported income per share of $0.13 improved from a reported income per share of $0.02 in the prior year.
- 1Q21 adjusted EPS of $(0.02) versus $(0.01) in the prior year.
First Quarter Business Review by Segment (Continuing Operations)
In 1Q21, Americas net revenues of $470.6 million or 42% of total Coty Continuing Operations, decreased by 3.7% versus the prior year. On a LFL basis, Americas net revenues decreased by 4.5%, showing a meaningful improvement over the prior quarter’s -51.5% LFL decline, particularly within the United States which saw a slight LFL decline and Brazil which returned to growth. The improvement in 1Q21 trends was supported by a number of factors, including: 1) pent up demand driving consumption as lockdowns eased; 2) winning innovations; and 3) continued strength within e-commerce.
During the quarter, we grew market share within U.S. prestige fragrances, with Marc Jacobs, Gucci, and Burberry having particularly strong performances. Marc Jacobs Perfect has been the #1 Fall fragrance launch, helping to propel the Marc Jacobs overall brand ranking up 6 spots, from #10 to #4. Gucci saw strong sell-out across both fragrances and cosmetics, with fragrance growth fueled by Gucci Bloom Profumo in female and Gucci Guilty in male, and Gucci cosmetics maintaining momentum, becoming the #1 ranked lipstick and #3 bronzer in Sephora US and Canada in recent data. We continued to make progress in our U.S. mass beauty business, with our mass cosmetics brands maintaining stable market share in retail. This share stabilization was supported by strong growth in Sally Hansen, fueled by the leading launch of the clean nail polish line good.kind.pure and the relaunch of the Miracle Gel line, as well as the continued range expansion of the CoverGirl Clean Fresh franchise. In Brazil, our value-priced local brands were positioned well in the current market context, with strong sell-out growth across our body care brands as well as the Risque nail color brand, which strengthened its position with the launch of its Diamond Gel line.
During the quarter, e-commerce penetration as a percentage of sales in the Americas region doubled to the low teens, with e-commerce sales for both prestige and mass brands nearly doubling from the prior year period.
The reported sales for the Americas segment benefited from the contribution from the Kylie Jenner joint venture. During 1Q21, the joint venture was pressured due to reduced supply related to its cosmetics third party manufacturer. However, Kylie Skin continued to deliver very solid growth during the quarter.
The Americas segment generated a reported operating income of $21.3 million in 1Q21, compared to a reported operating loss of $17.5 million in the prior year. The 1Q21 adjusted operating income was $47.4 million, up from an adjusted operating loss of $4.8 million in the prior year, driven by close management of marketing investment and strong fixed cost reduction more than offsetting the sales decline. The adjusted operating margin was 10.1% versus (1.0)% in the prior year.
In 1Q21, EMEA net revenues of $530.4 million, or 47% of total Coty continuing operations, declined by 21.6% versus the prior year. On a LFL basis, EMEA net revenues declined 24.4%. Sales trends in 1Q21 improved sequentially from the 67% LFL decline in 1Q20, but remained in decline due primarily to softer overall market trends in both prestige fragrances and mass cosmetics, as well as continued significant weakness in the travel retail channel.
In our prestige fragrance business, we gained market share in our core markets, Germany and the U.K., fueled by the strong performance of recent key launches including Hugo Boss Alive, Hugo Boss Bottled, Jil Sander Sun EDP and Marc Jacobs Perfect. Hugo Boss Alive, which was the #1 female launch in Germany in the spring, continued to perform well and now stands as the #8 female brand line in the market, while the men’s lines were supported by the strong performance of Hugo Boss Bottled. Marc Jacobs Perfect was the #1 prestige fragrance launch in the U.K., driving strong market share growth for the overall brand. In our mass beauty business, while the cosmetics category remained pressured, we saw areas of improvement as Rimmel – U.K.’s #1 mass cosmetics brand – continued grow its leading share, and the consumer shift to at-home manicures drove market share gains for Sally Hansen across U.K., Italy, France and the Netherlands.
1Q21 e-commerce penetration as a percentage of sales in the EMEA region grew strongly to the low teens, with double digit growth in e-commerce sales for both prestige and mass brands.
Reported operating income was $13.0 million in 1Q21 versus reported operating income of $28.2 million in the prior year. The 1Q21 adjusted operating income of $45.8 million declined from $60.1 million in the prior year, driven by the lower sales, partially offset by controlled marketing spend and solid fixed cost reductions. For 1Q21, the adjusted operating margin stayed constant at 8.6%.
1Q21 Asia Pacific net revenues of $123.1 million, or 11% of total Coty continuing operations, decreased 35.3% on a reported basis and declined 36.6% LFL. The vast majority of the decline was driven by the continued significant pressure in the travel retail channel as well as the continued active reduction of sales to low value channels, particularly in the prestige business, which we began in 2HFY20. Encouragingly, sell-out trends for our prestige brands in the Asia Pacific region were very strong during the quarter, increasing double-digits both off-line and online. In our mass business, we gained market share in our core business in Australia, driven by Sally Hansen and CoverGirl.
China sales trends continued to improve during 1Q21, with prestige brick & mortar and e-commerce sell-out increasing in the double-digits. While China currently accounts for a low single digit percentage of Coty sales, our prestige brands have continued to strengthen their positions, with double digit growth across Gucci, Burberry, Tiffany, Miu Miu and Chloe. Within Gucci and Burberry, we have been actively expanding the brands beyond the core fragrance offerings into prestige cosmetics, with cosmetics now accounting for ~20% of sales across these two brands in China.
Reported operating loss in 1Q21 of $19.0 million declined from reported operating income of $8.5 million in the prior year. The 1Q21 adjusted operating loss of $12.5 million declined from adjusted operating income of $14.7 million in the prior year, fueled by the operating deleverage on the declining sales, partially offset by reduced fixed costs and lower marketing investments. The 1Q21 adjusted operating margin of (10.2)% declined from 7.7% in the prior year.
First Quarter Fiscal 2021 Business Review by Channel (Continuing Operations)
- 1Q21 Prestige net revenues of $644.1 million, or 57.3% of Coty continuing operations, decreased 20.2% as reported and decreased 25.0% LFL, with the reported sales aided by the inclusion of Kylie Beauty sales in the current quarter. Prestige sales improved sequentially across all regions, but continued to decline as consumer traffic in stores has not returned to pre-COVID levels and the core travel retail channel remains heavily depressed, accounting for close to half of the decline in our Prestige business. Encouragingly, Prestige e-commerce sales continued to grow double digits in the quarter, and represented a high teens percentage of Prestige sales in 1Q21, double the prior year. Kylie Cosmetics sales in the quarter were pressured by reduced supply related to its cosmetics third party manufacturer, while Kylie Skincare continued to deliver strong growth, supported by the launch of the brand in Nordstrom in the U.S., Douglas across Europe, as well as by several new launches.
- 1Q21 Mass net revenues of 479.8 million, or 43% of Coty continuing operations, decreased 20.6% as reported and decreased 10.1% LFL, with the reported sales decline pressured by the inclusion of Younique revenues in the prior year period. Although sales in this channel showed sequential improvement from 4Q20, sales trends remain under pressure as mask wearing and social distancing continues to weigh on demand for color cosmetics. Encouragingly, Mass e-commerce sales continued to grow double digits in the quarter, and represented a high single digit percentage of our Mass business sales in 1Q21, double the prior year. Coty brands continued to see excellent performance on Amazon, growing market share with the e-retailer in the U.S., U.K., and Germany.
- 1Q21 Wella net revenues of $566.4 million increased 6.5% as reported and increased 6.5% LFL, driven by pent up consumer demand for services following the global salon closures in 4Q20 and associated inventory replenishment for both retail and professional hair products, continued strength within retail hair, and solid e-commerce growth.
Noteworthy Company Developments
Other noteworthy company developments include:
- On September 1, 2020, Sue Y. Nabi, the highly experienced business leader and beauty entrepreneur, officially began her appointment as Chief Executive Officer of Coty.
- On October 7, 2020, Coty announced the launch of direct-to-consumer flagship websites for Kylie Skin in the United Kingdom, France, Germany, and Australia.
- On October 21, 2020, Coty announced two additions to its leadership team with the appointments of Isabelle Bonfanti as Chief Commercial Officer, Luxury, and Jean-Denis Mariani in the newly created role of Chief Digital Officer.
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, November 6, 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: 3589374). The live audio webcast and presentation slides will be available at http://investors.coty.com. The conference call will be available for replay.
About Coty Inc.
Coty is one of the world’s largest beauty companies with an iconic portfolio of brands across fragrance, color cosmetics, and skin and body care. Coty is the global leader in fragrance, and number three in color cosmetics. Coty’s products are sold in over 150 countries around the world. Coty and its brands are committed to a range of social causes as well as seeking to minimize its impact on the environment. For additional information about Coty Inc., please visit www.coty.com.
Forward Looking Statements
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 sale of the Professional and Retail Hair business, including the Wella, Clairol, OPI and ghd brands (the “Wella Business”) and the investment by Rainbow UK Bidco Limited ((“KKR Bidco”) an affiliate of funds and/or separately managed accounts advised and/or managed by Kohlberg Kravis Roberts & Co. L.P. and its affiliates (collectively, “KKR”)) in connection with the standalone business (the “Wella Transaction”), including timing of the Wella Transaction and the use of proceeds from the Wella Transaction, the Company’s future operations and strategy (including the expected implementation and related impact of its strategic priorities), ongoing and future cost efficiency 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), investments, licenses and portfolio changes, synergies, savings, performance, cost, timing and integration of acquisitions, including the strategic partnership with Kylie Jenner and the announced pending transaction with Kim Kardashian West, future cash flows, liquidity and borrowing capacity, timing and size of cash outflows and debt deleveraging, the availability of local government funding or reimbursement programs in connection with COVID-19 (including expected timing and amounts), 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, and the priorities of senior management.
Olga Levinzon, +1 212 389-7733
Andra Mielnicki, +1 917 285 0586