Coty (COTY) Stock Gains Over 9% On Q1 Earnings & Sales Beat

Coty Inc. (NYSE:COTY) posted first-quarter fiscal 2018 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate with the former marking its third straight beat. While the top line surged considerably thanks to gains from buyouts, organic sales declined year over year owing to weakness in the Consumer Beauty segment.

Nonetheless, the better-than-expected results and Coty’s solid ongoing prospects seems to have encouraged investors. Evidently, shares of the Zacks Rank #3 (Hold) company are up 9.1% in the pre-market trading session. Let’s see if this can bring a turnaround to Coty’s past stock performance, as shares of this cosmetics company have plunged 25% in the past six months, as against the industry’s 10.6% gain.

The company’s adjusted earnings of 10 cents per share slumped 57% year over year, while it surpassed the Zacks Consensus Estimate of 7 cents. On a GAAP basis, the company reported a loss of 3 cents per share.

Quarter in Detail

The company generated revenues of $2,238.3 million, which topped the Zacks Consensus Estimate of $2,224 million. Further, revenues surged over 100% year over year, driven by contributions from the P&G Beauty business buyout. Also, contributions from the acquisitions of ghd and Younique aided sales growth. On a constant currency basis, revenues increased 5%.

Excluding the impacts from ghd and Younique, organic revenues of the combined company (Legacy-Coty and P&G Beauty Business) dipped 2% on a constant currency basis. This was mainly accountable to softness in the company’s Consumer Beauty segment, somewhat compensated by solid growth in the Luxury unit and modest improvement in the Professional Beauty unit.

Adjusted gross margin expanded 280 basis points to 61.6% in the quarter thanks to the buyouts of higher margin businesses, as well as synergies from supply chain and procurement. While adjusted operating income jumped 17% to $195.1 million, adjusted operating margin contracted 670 basis points to 8.7% in the quarter.

Segment Details

Luxury: Luxury net revenues surged 70% to $764.4 million on a reported basis, backed by gains from the P&G Beauty business buyout. On a currency neutral basis, the combined company’s revenues rose 4%, attributable to strength in Hugo Boss, Tiffany & Co. (NYSE:TIF) and Gucci. Adjusted operating income for Luxury remained flat year over year at $90.6 million in the quarter.

Consumer Beauty: Consumer Beauty soared 82% to $1,043.4 million on a reported basis, driven by contributions from Younique and P&G Beauty business. On a currency-neutral basis, net revenues of the combined company climbed 2%, thanks to 10% contribution from Younique, largely offset by an 8% drop in underlying revenues of the combined entity. The latter stemmed from continued sluggishness in the global mass beauty space and weak performance of some retail hair brands. Adjusted operating income for Consumer Beauty advanced 54% to $88.3 million.

Professional: Professional Beauty net revenues of $430.5 million improved over 100%, driven by gains from P&G Beauty business and ghd buyouts. On a currency-neutral basis, sales grew 13% for the combined entity, including 12% gains from ghd and consistent strength in Wella and System Professional sales. This was partly mitigated by lower Clairol Professional sales. Adjusted operating income for Professional dipped marginally to $16.9 million.

On a region-wise basis, net revenues surged over 100% (on a reported basis) across North America and Europe, driven by Younique and ghd’s contributions, respectively. However, the respective sales were partly hampered by softness in the United States and Germany. Sales at the ALMEA region jumped 74% on a reported basis.

Other Financial Updates

Coty ended the quarter with with cash and cash equivalents of $919.2 million, long-term debt (net) of $7,541.9 million and total shareholders’ equity of $9,452.3 million (excluding non-controlling interests).

The company used net cash from operating activities of $8.9 million and free cash flow in the quarter amounted to negative $120.3 million.

In a separate press release, the company also announced a dividend of 12.5 cents per share, payable on Dec 14 to shareholders of record as on Nov 30. Further, on Sep 14, the company paid a quarterly dividend of 12.5 cents per share for a total of $93.6 million.

Other Developments

Earlier this month, the company concluded the buyout of its unique international license rights for Burberry Beauty luxury fragrances, cosmetics and skincare, which will extend over the long term.

Outlook

Management remains pleased with the solid growth at its Luxury business and ongoing momentum at the Professional segment. Further, enhanced gross margin and effective cost management helped the company log higher profits. The company remains optimistic about the ongoing synergies from buyouts, which have been solidifying its portfolio. That said, the company expects improved net revenue growth in the remainder of fiscal 2018, with organic sales likely to remain flat year over year in the second half of the fiscal. Management also expects healthy margin improvement over the remainder of fiscal 2018.

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