Coty Inc. Form 10-Q Summary
Business context and reporting period. Coty manufactures and sells beauty products worldwide across Luxury, Consumer Beauty and Professional Beauty. This report covers the fiscal second quarter and six months ended December 31, 2019; the comparable periods ended December 31, 2018. Amounts are U.S. dollars unless noted.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2019 | Prior year | Six months ended Dec. 31, 2019 | Prior year |
|---|---|---|---|---|
| Revenue | $2,345.0M | $2,511.2M | $4,287.8M | $4,542.5M |
| Gross profit | $1,485.7M | $1,554.5M | $2,690.1M | $2,776.7M |
| Operating income (loss) | $35.4M | $(804.6)M | $161.4M | $(825.3)M |
| Net income (loss) attributable to Coty | $(21.1)M | $(960.6)M | $31.2M | $(972.7)M |
| Adjusted operating income (non-GAAP) | $325.0M | $322.3M | $479.7M | $463.1M |
| Adjusted net income attributable to Coty (non-GAAP) | $205.2M | $181.9M | $255.7M | $262.4M |
- Second-quarter revenue fell 7% reported, or 3% excluding the Younique divestiture; excluding that divestiture, volume declined 7%, foreign exchange reduced revenue 2%, and price/mix added 6%.
- Second-quarter gross margin rose to 63.4% from 61.9%. Adjusted operating margin increased to 13.9% from 12.8%; GAAP operating margin was 1.5%, versus (32.0)% in the prior year, which included substantial impairment charges.
- For the six months, operating cash flow was $462.0M, versus $237.7M; investing cash outflow was $119.4M, versus $300.1M; financing cash outflow was $380.7M, versus financing inflow of $153.7M. Cash, cash equivalents and restricted cash ended at $339.5M.
- At December 31, 2019, cash and cash equivalents were $288.8M and total debt was $7,494.7M, including $7,233.8M of long-term debt, net. Debt was $7,745.8M at June 30, 2019. Coty reported compliance with its credit agreement covenants.
- Current assets were $3,023.3M and current liabilities were $3,513.6M. The filing cites seasonal cash needs and says it expects cash generation and access to credit to meet near- and long-term liquidity needs.
Material changes and management commentary
- Consumer Beauty remained the principal revenue weakness: second-quarter sales declined 17% reported and 9% excluding Younique; six-month sales declined 16% and 10%, respectively. Coty cited market and share declines, including North American shelf-space losses, as well as distributor changes and deliberate reductions in lower-priced channels.
- Luxury revenue was flat in the quarter and up 1% for six months; Professional Beauty revenue rose 1% in both periods. Coty attributed support in Luxury to brands including Burberry and Gucci, and in Professional Beauty to ghd.
- Management said its four-year Turnaround Plan aims to stabilize and gradually accelerate revenue growth, improve gross margin and control costs, and reduce debt. Coty reported early, mixed progress: mass-market share losses continued, but their pace had slowed. Management cited improved gross margin, price increases, and targeted media support.
- Coty expects approximately $600M of incremental cash costs related to the Turnaround Plan, in addition to approximately $160M of cash costs for previously announced restructuring and realignment programs. It spent approximately $86M on the Turnaround Plan and prior programs in the six months. The filing also estimates approximately $160M of additional restructuring charges over four fiscal years for approved actions.
- In October 2019, Coty began exploring strategic alternatives, including divestiture, for Professional Beauty, associated hair brands and its Brazilian operations. Any proceeds are intended for debt repayment and shareholder returns; no transaction was assured.
- Coty completed the Younique divestiture in September 2019 for $50M cash and a $27.9M secured note, recording an $84.5M pretax gain. On January 6, 2020, after quarter-end, Coty acquired 51% of King Kylie for a base $600M cash purchase price; purchase accounting was incomplete at filing.
Risks, contingencies and unusual items
- The prior-year comparison is materially affected by $965.1M of second-quarter and $977.7M of six-month asset impairment charges; Coty recorded no impairment charges in the current periods. Current-period results also include restructuring, acquisition/divestiture costs and the Younique gain. Adjusted measures exclude specified items and are non-GAAP.
- Net interest expense increased to $71.1M for the quarter and $148.5M for six months, primarily reflecting transactional foreign exchange. The effective tax rate was unusually volatile; the six-month rate was (324.5)%, with a tax benefit despite pretax income.
- Coty disclosed $61.9M of Brazilian tax assessments, including estimated interest and penalties, which it is contesting and for which it has not accrued a loss because it considers a loss not probable. It also disclosed stockholder litigation relating to a tender offer and other legal and regulatory proceedings; outcomes are uncertain.
- Other risks include execution and costs of the turnaround and strategic review, consumer and category weakness, distributor and retail-channel changes, foreign exchange, debt and covenant requirements, and operational disruption. Coty also identified the coronavirus outbreak in China as a potential risk in its forward-looking disclosures, not as a quantified impact in these reported results.
Important facts for investors to verify
- Whether Consumer Beauty’s revenue and market-share trends stabilize, and whether price/mix improvements can offset ongoing volume declines.
- Delivery, costs and cash requirements of the Turnaround Plan, including the projected $600M of incremental cash costs and planned debt reduction.
- Whether the strategic review results in divestitures, the timing and proceeds of any transaction, and how proceeds are allocated.
- King Kylie’s final purchase-price allocation, integration and financial contribution following the $600M acquisition.
- Debt repayment capacity, covenant headroom, liquidity and the sustainability of operating cash flow and dividends.
- Developments in the Brazilian tax assessments and tender-offer litigation, and any resulting financial exposure.