Coty Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended June 30, 2020; filed August 27, 2020. Although the request metadata refers to “2019 Q4,” this filing reports FY2020, not a standalone 2019 fourth quarter. Unless noted, amounts are U.S. dollars in millions and results are from continuing operations; the Wella Business is presented as discontinued operations.
Business context and reporting period
Coty sells prestige and mass-market beauty products, principally fragrances, color cosmetics, and skin and body care, in more than 150 countries. Following a reporting-structure change in the third quarter, continuing operations are reported in Americas, EMEA, and Asia Pacific. The Wella Business, including Wella, Clairol, OPI, and ghd, was classified as discontinued operations following a June 2020 sale agreement.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue, continuing operations | $4,717.8 | $6,287.9 |
| Gross profit / gross margin | $2,726.6 / 57.8% | $3,789.4 / 60.3% |
| SG&A / percentage of revenue | $3,120.0 / 66.1% | $3,467.9 / 55.2% |
| GAAP operating loss | $(1,236.5) | $(3,688.4) |
| Adjusted operating income (loss), non-GAAP | $(161.7) | $490.8 |
| Net loss from continuing operations | $(1,089.9) | $(3,890.6) |
| Net loss attributable to Coty common stockholders | $(1,013.2) | $(3,784.2) |
| Net cash from (used in) operating activities | $(50.9) | $639.6 |
| Cash and cash equivalents at year-end | $308.3 | $340.4 |
| Total debt, net of discount (selected data) | $8,147.3 | $7,735.0 |
Revenue fell 25% reported; excluding acquisition and divestiture effects, it fell 22%, reflecting a 20% volume decline and a 2% adverse foreign-exchange effect. All three continuing-operations regions declined: Americas 21%, EMEA 21%, and Asia Pacific 24%. The pandemic particularly affected prestige, salon, and travel-retail channels; mass products sold through grocery and drug channels were relatively more resilient.
Gross margin contracted about 250 basis points, with reduced volume, inventory obsolescence, underutilized facilities, and an unfavorable prestige royalty mix among the cited factors. SG&A decreased in dollars but rose sharply as a share of revenue because sales fell faster than costs. The year’s reported operating loss included $434.0 of impairment charges, $361.9 of restructuring and business realignment costs, and $157.3 of acquisition- and divestiture-related costs; a $111.5 gain on the Younique divestiture partly offset these items. FY2020 adjusted operating loss was $161.7, versus adjusted operating income of $490.8 in FY2019.
Investing cash outflow was $833.4, including $592.2 paid net of acquired cash for King Kylie; financing cash inflow was $877.3, including $724.5 net proceeds from Series B preferred stock and higher revolving borrowings. Coty reported immediate liquidity of $1,618.1 at year-end, comprising cash and available revolving-credit borrowings. This is not the same as cash on hand.
Material changes versus the prior comparable year
- COVID-19 drove a severe second-half sales decline; April was identified as the low point. Management reported improving revenue trends in May and June and further improvement in July and the first three weeks of August, but revenue remained below the prior-year comparable periods.
- FY2019’s much larger operating loss reflected $3,729.0 of continuing-operations impairment charges. FY2020 still recorded $434.0 of impairment charges, including $105.0 of EMEA goodwill impairment and $329.0 of indefinite-lived intangible impairment.
- Operating cash flow swung from $639.6 provided in FY2019 to $50.9 used in FY2020, mainly due to weaker operating cash results as pandemic-related sales fell.
- Debt increased to $8,147.3 in selected financial data from $7,735.0. SG&A and cost of sales declined in dollars, but both weighed more heavily relative to the smaller revenue base.
- FY2020 continuing results reflect the September 2019 Younique divestiture and January 2020 King Kylie acquisition; comparisons are also affected by the Wella discontinued-operations presentation.
Outlook, management commentary, risks, and unusual items
- Transformation: Coty plans to reduce its fixed cost base by 25% by the end of FY2023, alongside supply-network and organizational changes, cost control, digital and e-commerce expansion, and balance-sheet deleveraging. The filing estimates approximately $600 million of one-time cash costs over FY2020–FY2023, in addition to approximately $160 million connected with previous restructuring programs.
- COVID-19 outlook: Management expected continued sales pressure and a gradual, uneven recovery, with possible renewed outbreaks and non-linear consumer demand. It did not provide a clear numerical revenue or earnings forecast.
- Wella transaction: The June 1, 2020 agreement valued the business at $4.3 billion on a cash- and debt-free basis. KKR was to own 60% of the standalone business and Coty retain 40%; closing was expected in the first half of FY2021. Coty anticipated using sale proceeds to reduce debt. Closing, proceeds, transition costs, and retained-stake value remained uncertain.
- Liquidity and covenants: An April 2020 credit amendment suspended the total-net-leverage covenant test through March 31, 2021, imposed a $350 million minimum-liquidity covenant through that date, and restricted certain investments, restricted payments, and additional debt. Coty said it was compliant at June 30, 2020. Cash dividends were suspended; management expected the suspension to continue through April 1, 2021 or until net debt to Adjusted EBITDA reached 4x, subject to board discretion and debt terms.
- KKR financing and dilution: KKR purchased $750 million of Series B preferred stock in May 2020; a further $250 million purchase closed July 31, 2020. The preferred stock accrues dividends at 9% annually and is convertible; the filing stated the June 30 balance and accrued dividends were convertible into approximately 121.2 million common shares. Conversion could materially dilute common shareholders.
- Impairment sensitivity: Management cited limited valuation headroom for the Americas reporting unit and Sally Hansen trademark, and no excess fair value for impaired EMEA goodwill and certain trademarks. Further deterioration in growth assumptions or higher discount rates could trigger additional impairment.
- Contingencies and other risks: Risks include pandemic-related demand and supply disruption, high leverage and refinancing needs, execution of the transformation and Wella separation, competition and retailer shelf-space losses, foreign exchange, licenses, and goodwill or trademark impairments. Brazilian tax assessments, including interest and penalties, totaled approximately $46.1 million for 2016–2017 and $107.1 million for 2017–2019; Coty disputed them and had not accrued a loss because it did not consider loss probable. Stockholder litigation related to the Cottage tender offer remained pending; management said current legal proceedings were not expected to have a material effect, while noting outcomes were uncertain.
Most important facts for investors to verify
- Whether Wella closed on the anticipated timetable, actual net proceeds, debt repayment, transition-service obligations, and the value and accounting for Coty’s retained 40% interest.
- Subsequent revenue, volume, and margin recovery by region and channel, particularly prestige, salon, travel retail, and mass color cosmetics.
- Actual fixed-cost savings, restructuring cash outlays, and progress toward the 25% cost-base reduction by FY2023.
- Debt balances, cash and revolver availability, covenant compliance, refinancing needs, and the timing and conditions for any dividend resumption.
- Potential common-share dilution and preferred-stock dividend accruals following the Series B issuance and any conversion.
- Further impairment exposure, especially EMEA goodwill, CoverGirl and Max Factor trademarks, and the limited valuation headroom disclosed for Americas and Sally Hansen.
- Developments in the Brazilian tax assessments and Cottage tender-offer litigation.