Coty Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2021; compared with the three months ended September 30, 2020. Coty manufactures and sells fragrance, color cosmetics, and skin and body care products. The Wella Professional and Retail Hair businesses are reported as discontinued operations in the prior-year comparison following their sale in November 2020.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net revenue | $1,371.7 million | $1,124.1 million |
| Gross profit / margin | $866.9 million / 63.2% | $659.2 million / 58.6% |
| Operating income (loss) / margin | $17.2 million / 1.3% | $(66.0) million / (5.9)% |
| Adjusted operating income / margin (non-GAAP) | $200.5 million / 14.6% | $85.7 million / 7.6% |
| Adjusted EBITDA / margin (non-GAAP) | $278.5 million / 20.3% | $166.6 million / 14.8% |
| Net income from continuing operations | $228.9 million | $122.6 million |
| Net income attributable to Coty | $226.0 million | $221.4 million |
| Net income attributable to common stockholders | $103.0 million | $200.6 million |
| Basic and diluted EPS | $0.13 | $0.26 basic / $0.24 diluted |
| Operating cash flow | $285.7 million | $42.6 million |
| Capital expenditures | $45.0 million | $70.9 million |
- Revenue rose 22%: Prestige increased 35% to $870.7 million, while Consumer Beauty increased 4% to $501.0 million. Management attributed growth primarily to store reopenings, improved leisure travel, product launches, e-commerce, and distribution gains.
- Gross margin expanded about 460 basis points, driven by product mix, manufacturing efficiencies, lower inventory obsolescence costs, and price increases; higher material and freight costs partially offset these benefits.
- Operating results improved, but SG&A rose 33% to $776.3 million. The increase included sharply higher share-based compensation, principally related to the CEO award, and higher advertising and promotional spending.
- GAAP net income included a $390.0 million unrealized gain from the fair-value remeasurement of Coty’s Wella investment, recorded in other income. The quarter also included $108.2 million of share-based compensation expense in adjusted operating income reconciliation. Adjusted measures exclude specified items and are non-GAAP.
- Operating cash flow improved year over year, reflecting higher cash earnings and working-capital inflows, including increases in accounts payable and accrued liabilities. Investing cash outflow was $45.0 million; financing cash outflow was $122.7 million, including net revolver repayments.
Balance sheet, debt and liquidity
- At September 30, 2021, cash and cash equivalents were $376.9 million; restricted cash was $45.5 million. Total current assets were $2,060.2 million and current liabilities were $3,071.8 million.
- Total debt was $5,332.0 million, including $5,250.0 million of long-term debt, net. Debt declined from $5,481.5 million at June 30, 2021. The company reported compliance with its credit-agreement covenants.
- The credit agreement’s minimum liquidity covenant was $500 million following the Wella sale-related debt prepayments. Management stated it believed available cash and planned expense management provided sufficient liquidity and covenant headroom for foreseeable operating needs, debt service, and capital expenditures.
- Coty amended its revolving facilities in September 2021, adding a $700 million class maturing in April 2025. As of November 5, it had lender commitments to replace existing revolving commitments totaling $2.75 billion with a $2.0 billion facility, expected to close in the second quarter of fiscal 2022, subject to conditions.
Material changes and transactions
- Coty’s retained 40% Wella investment was valued at $1.65 billion at quarter-end, up from $1.26 billion at June 30; the $390 million gain was unrealized and based on Level 3 valuation methods and significant unobservable inputs.
- On October 20, 2021, Coty completed a sale of a 9.4% Wella stake in exchange for redemption of Series B preferred shares and accrued dividends, reducing its Wella holding to approximately 30.6%. On November 6, it agreed to sell a further approximately 4.7%, expected to reduce its holding to 25.9% upon anticipated closing on November 30.
- Series B preferred stock dividends and deemed dividends reduced income attributable to common stockholders. The preferred stock carries a 9% annual dividend rate. A quarter-end exchange agreement led to $394.2 million of mandatorily redeemable preferred stock being classified as a current liability, alongside $453.7 million of preferred stock in mezzanine equity.
- The company realigned reporting to Prestige and Consumer Beauty segments. It reported $12.4 million of restructuring costs in the quarter and expected approximately $65 million of additional charges over the next two fiscal years for approved Transformation Plan actions.
Outlook, commentary and risks
- No specific quantified revenue, earnings, or cash-flow guidance is provided in the supplied filing text. Management described recovery from COVID-19 as gradual, uneven, and potentially nonlinear; Prestige and travel retail showed stronger recovery, while some Consumer Beauty categories remained affected by consumer behavior and restrictions.
- Management’s priorities include innovation, growth in Prestige and skincare, expansion in China, digital and e-commerce development, cost control, gross-margin improvement, and debt reduction. The Transformation Plan aims to reduce the cost base through fiscal 2023, with further savings initiatives contemplated for fiscal 2024.
- Management cited global supply-chain challenges, freight and material inflation, currency movements, changing consumer demand, COVID-19 restrictions, execution risks from concurrent transformation initiatives, and the company’s substantial debt as risks. It said alternative transportation and financial-management measures may not fully offset supply-chain and inflation impacts.
- Brazilian subsidiaries faced several open tax assessments totaling approximately $236.4 million at stated exchange rates, including a large ICMS assessment. Coty said it believed it had meritorious defenses and had not accrued a loss because it did not consider a loss probable. A separate Goiás assessment of approximately $66.6 million was dismissed in the company’s favor during the quarter.
- Other disclosed matters include ongoing Delaware stockholder litigation and potential legal, regulatory, and tax exposures. The company said it could not reasonably estimate a loss range for certain lawsuits; management believed current legal proceedings would not materially affect the company, while noting outcomes are uncertain.
Investor verification points
- Assess how much of reported earnings reflects recurring operations versus the $390 million unrealized Wella gain, preferred-stock charges, and the prior-year tax benefit and discontinued Wella earnings.
- Review the assumptions and sensitivity of the Level 3 Wella valuation, and the financial, ownership, and preferred-stock effects of completed and planned Wella stake sales.
- Verify debt maturities, refinancing execution, covenant headroom, and the company’s ability to deleverage while paying 9% Series B preferred dividends.
- Track cash conversion and working-capital movements, especially receivables, accrued liabilities, and the use of receivables factoring.
- Monitor recovery by segment and channel, supply-chain and inflation effects, Transformation Plan savings and charges, Brazilian tax assessments, and ongoing litigation.