Coty Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2022. The supplied filing is for FY2022 Q3, not 2021 Q3. Amounts are U.S. dollars unless noted.
Business context
Coty manufactures and sells fragrance, color cosmetics, and skin and body care products worldwide. Its reportable segments are Prestige and Consumer Beauty. Coty held a 25.9% stake in Wella at quarter-end and accounts for that investment at fair value.
Financial results
| Metric | Three months ended March 31, 2022 | Nine months ended March 31, 2022 |
|---|---|---|
| Net revenue | $1,186.2 million; up 15% year over year | $4,136.1 million; up 16% |
| Gross profit / gross margin | $763.1 million / 64.3%; margin up about 240 bps | $2,647.1 million / 64.0%; margin up about 440 bps |
| Operating income (loss) / margin | $57.1 million / 4.8%, versus $(1.4) million | $318.3 million / 7.7%, versus $(50.4) million |
| Net income attributable to Coty | $53.6 million, versus $15.6 million | $541.0 million, versus a loss of $15.3 million |
| Common EPS | $0.06, versus $(0.02) | $0.42, versus $(0.12) |
| Operating cash flow | Not separately provided for the quarter | $759.5 million, versus $286.4 million |
Adjusted measures: Nine-month adjusted operating income was $550.4 million, up 41%, and adjusted EBITDA was $772.9 million, up 22%. Adjusted net income attributable to Coty was $237.8 million, down from $242.6 million; adjusted diluted EPS was $0.29 versus $0.32. For the quarter, adjusted operating income rose 11% to $113.6 million, while adjusted EBITDA was $182.5 million, roughly flat year over year.
Segment performance: Q3 Prestige revenue grew 21% to $726.4 million, with operating income of $83.8 million. Consumer Beauty revenue grew 8% to $459.8 million, but segment operating results swung to a $20.4 million loss from $9.1 million of income. For the nine months, segment revenue rose 21% in Prestige and 8% in Consumer Beauty.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $668.6 million at March 31, 2022; total debt was $4.906 billion, including $516.5 million classified as current. Long-term debt, net, was $4.317 billion.
- Operating cash flow of $759.5 million and investing cash flow of $281.4 million were offset in part by $642.7 million of financing cash outflows. Cash, cash equivalents, and restricted cash ended the period at $700.2 million.
- Coty reported compliance with its credit agreement covenants at quarter-end. Its $2.0 billion revolving facility matures in April 2025.
- Coty redeemed its €550 million 2023 Euro Notes on April 15, 2022, using cash and a revolver draw. The company said it expects to use future Wella distributions to pay down debt.
- Common dividends remained suspended; management said suspension is expected to continue until net debt to adjusted EBITDA reaches 2x, subject to board discretion.
Material changes, outlook, and risks
- Revenue growth reflected store reopenings, recovering travel and customer traffic, product launches, pricing and mix, and e-commerce. Management cited successful Prestige launches and Consumer Beauty market-share gains.
- Gross-margin improvement benefited from product mix, pricing, manufacturing efficiencies, and lower prior-year inventory charges, partly offset by inflation. Higher advertising and promotional spending and CEO-related stock compensation weighed on SG&A and adjusted margins.
- Nine-month reported earnings were materially affected by a $579.0 million realized and unrealized gain related to the Wella investment, recorded in other income. Wella is a Level 3 fair-value investment, so valuation depends on significant unobservable assumptions. Reported results also included a $114.6 million gain on real-estate sales.
- Management expected FY2022 reported revenue growth at the upper end of its low-to-mid-teens range, excluding foreign exchange. This is company guidance, not a guarantee.
- Following the quarter, Coty announced it would wind down its Russian operations. Management estimated fourth-quarter pretax charges of $100 million or more, including net cash charges not expected to exceed $40 million; estimates may change as the wind-down proceeds.
- Management cited inflation, supply-chain constraints, COVID-related disruptions and China lockdowns, foreign-exchange exposure, and the Russia-Ukraine war as risks. It said inflation headwinds could become more significant in Q4 and FY2023 and that pricing and other mitigations may not fully offset them.
- The filing disclosed Brazilian tax assessments that Coty disputes and for which it had not accrued a loss, stating that loss was not considered probable. A $34.0 million advance related to potential Wella tax-credit proceeds remains subject to clawback if recovery conditions are not met.
Important facts for investors to verify
- How much reported profit and future performance depend on Wella fair-value movements, and how sensitive that valuation is to its assumptions.
- Whether revenue growth and gross-margin gains persist as inflation, promotional spending, and supply-chain costs evolve.
- The final charges, cash costs, asset impairments, and operating consequences of the Russia wind-down.
- Debt maturities, borrowing costs, covenant headroom, and progress toward the stated deleveraging objectives.
- Developments in disputed Brazilian tax assessments and the conditions attached to the Wella contingent proceeds.