Coty Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2020; Coty’s fiscal year ends June 30. The request metadata says “2019 Q3,” but the filing itself reports fiscal 2020 third quarter.
Business context and results
Coty manufactures and sells fragrance, cosmetics, hair care, and skin and body care products worldwide. The quarter was heavily affected by COVID-19-related store, salon, and travel-retail closures and reduced consumer traffic. Coty also continued its turnaround and strategic review, and completed its acquisition of a 51% interest in King Kylie in January 2020.
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Nine months ended March 31, 2020 | Nine months ended March 31, 2019 |
|---|---|---|---|---|
| Net revenues | $1,528.0m | $1,990.6m | $5,815.8m | $6,533.1m |
| Gross profit / margin | $910.9m / 59.6% | $1,249.4m / 62.8% | $3,601.0m / 61.9% | $4,026.1m / 61.6% |
| Operating income (loss) | $(258.8)m | $85.5m | $(97.4)m | $(739.8)m |
| Net loss attributable to Coty | $(271.6)m | $(12.1)m | $(240.4)m | $(984.8)m |
| Basic and diluted loss per share | $(0.36) | $(0.02) | $(0.32) | $(1.31) |
Financial position, cash flow, and material changes
- Quarterly revenue fell 23% year over year; excluding the King Kylie acquisition and Younique divestiture, it fell 22%, reflecting an 18% volume decline, 2% unfavorable currency, and 2% unfavorable price/mix. Nine-month revenue declined 11% reported and 9% excluding those transactions.
- Quarterly gross margin fell about 320 basis points, mainly because lower volume increased underutilized-facility costs and inventory obsolescence. Nine-month gross margin improved about 30 basis points.
- Adjusted operating income, a non-GAAP measure, was $0.1m for the quarter versus $229.5m a year earlier; for nine months it was $479.8m versus $692.6m. Adjusted net income was a quarterly loss of $61.7m versus income of $101.6m, and nine-month income of $194.0m versus $364.0m.
- Nine-month operating cash flow was $204.5m, down from $451.4m. Investing cash outflow was $772.8m, including $592.2m paid for King Kylie, partly offset by lower capital expenditure and $25.6m net proceeds from Younique. Financing cash inflow was $1,529.8m, principally reflecting increased revolving-credit borrowings.
- Cash and cash equivalents were $1,278.5m at March 31, 2020, versus $340.4m at June 30, 2019. Coty reported $1,289.7m of immediate liquidity at March 31, including available cash and revolving-credit availability.
- Total debt was $9,425.9m, compared with $7,745.8m at June 30, 2019; long-term debt, net, was $9,172.0m. Coty said it drew on revolving facilities to bolster liquidity during the pandemic. Nine-month net interest expense increased to $222.1m from $204.4m.
- Current assets were $3,673.1m and current liabilities $3,085.8m at March 31. Operating lease liabilities of $533.9m were recognized following adoption of the lease accounting standard.
Outlook, management commentary, and risks
- Management expected continued weak volume trends until containment measures eased and consumer traffic recovered, with recovery likely to be gradual and sales trends potentially nonlinear. The filing gives no specific revenue or earnings guidance.
- Coty announced plans to reduce its fixed cost base by 25% by the end of fiscal 2023, including changes to its supply network and organization and reductions in discretionary spending. It expected about $600m of incremental cash costs for the turnaround plan, in addition to about $160m of cash costs for previously announced programs. A May 2020 update also cited approximately $170m of additional restructuring charges over four fiscal years for approved actions.
- On April 29, 2020, Coty amended its credit agreement: the net-leverage test was suspended through March 31, 2021, a $350m minimum-liquidity covenant applied during that period, and certain investments, restricted payments, cash dividends, and additional secured debt were limited. Coty reported compliance with its covenants at March 31. The board subsequently suspended dividends; management expected suspension through April 1, 2021 or until net debt to Adjusted EBITDA reached 4x, if later.
- Subsequent to quarter-end, Coty announced a nonbinding MOU to negotiate the sale of a 60% interest in Professional Beauty and related hair brands to KKR at a stated $4.3bn enterprise value; Coty would retain 40%. It also agreed to a $750m Series B preferred investment from KKR, with a further $250m investment conditional on signing the sale transaction. These transactions were not completed as of the filing date.
- COVID-19 caused broad demand disruption, especially in prestige, professional, and travel-retail channels. Management also cited execution risks from simultaneous turnaround and strategic-review activities, customer and supply-chain disruption, foreign exchange, debt and liquidity needs, and possible future impairments.
- Coty recorded $40.4m of trademark impairment charges for CoverGirl, Max Factor, and Bourjois; it recorded no goodwill impairment in the quarter. Americas and EMEA goodwill fair values exceeded carrying values by 15.9% and 4.4%, respectively, making the results sensitive to forecast and discount-rate assumptions.
- Other notable items included a $84.5m gain on the Younique sale during the nine-month period, $85.3m of acquisition and divestiture-related costs, and $19.0m of share-based compensation expense related to repurchasing preferred shares from the CEO.
Key facts for investors to verify
- Whether COVID-19 demand declines, margins, and operating cash flow recover in line with management’s assumptions.
- Whether Coty can meet the amended $350m minimum-liquidity covenant and manage its debt maturities, including substantial amounts due in fiscal 2023.
- Whether the proposed KKR transactions reach definitive agreements, close on the stated terms, and deliver proceeds available for debt reduction.
- Whether the 25% fixed-cost reduction and turnaround savings are achieved, and how much additional cash restructuring costs require.
- Whether further impairment charges arise, particularly for the Americas and EMEA reporting units and vulnerable trademarks.
- The status and potential financial effect of the Brazilian tax assessments of approximately $47.9m and the disclosed shareholder litigation.