Coty Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2023 (Coty fiscal 2023 third quarter). The request metadata labels this “2022 Q3,” but the filing covers fiscal 2023 Q3. Unless stated otherwise, dollar amounts are in millions.
Business context and results
Coty manufactures and sells fragrance, color cosmetics, skincare and body-care products globally. It reports Prestige and Consumer Beauty segments. Results are seasonal, with holiday-related demand affecting sales and working capital.
- Quarter revenue: $1,288.9, up 9% year over year as reported and 11% excluding the prior-year quarter’s Russia revenue. Growth reflected favorable pricing and mix, higher unit volume and prestige fragrance demand, partly offset by currency translation.
- Nine-month revenue: $4,202.5, up 2% as reported and 2% excluding prior-year Russia revenue. Favorable price and mix was partly offset by foreign-exchange headwinds and lower Prestige unit volume.
- Quarter segments: Prestige revenue was $799.7, up 10%; Consumer Beauty revenue was $489.2, up 6%. Nine-month revenue was $2,620.9 for Prestige, up 1%, and $1,581.6 for Consumer Beauty, up 3%.
Financial metrics and changes
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Gross profit / margin | $810.8; 62.9%, versus 64.3% a year earlier | $2,697.8; 64.2%, versus 64.0% |
| Operating income / margin | $43.5; 3.4%, versus $57.1 and 4.8% | $414.7; 9.9%, versus $318.3 and 7.7% |
| Net income attributable to Coty Inc. | $108.4, versus $53.6 | $475.3, versus $541.0 |
| GAAP diluted EPS | $0.12, versus $0.06 | $0.54, versus $0.42 |
| Operating cash flow | Not provided for the quarter alone | $520.8, versus $759.5 |
Quarter gross margin declined about 140 basis points, reflecting trade incentives, inflation and freight, partly offset by manufacturing efficiencies and productivity. Nine-month gross margin improved about 20 basis points. Nine-month operating income increased despite revenue growing only modestly; adjusted operating income, a non-GAAP measure, rose 15% to $633.7, and adjusted EBITDA rose 4% to $807.4. For the quarter, adjusted operating income increased 8% to $122.7 while adjusted EBITDA was approximately flat at $181.9. These adjusted measures exclude specified items and should not be treated as GAAP results.
Reported earnings include substantial non-operating fair-value effects. Nine-month other income was $397.0, including a $210.0 gain on Coty’s Wella investment; the comparable-period Wella gain was $579.0. Quarter net income also benefited from gains on forward repurchase contracts. Thus, changes in reported net income do not solely reflect operating performance.
Cash and debt: At March 31, cash and cash equivalents were $245.0 (plus $32.0 restricted cash). Total debt was $4,344.0, versus $4,498.5 at June 30, 2022; long-term debt, net, was $4,225.0. Current assets of $1,914.5 were below current liabilities of $2,757.3. Nine-month capital expenditures were $156.0. Cash from operations fell year over year, mainly due to working-capital outflows, including inventory investment.
Outlook, risks and unusual items
- Management expected fiscal 2023 net revenue growth in the high single digits, excluding foreign exchange and the Russia exit. This is management’s stated outlook, not a guarantee.
- Supply-chain constraints, especially component shortages and transport delays, continued to affect order fill rates. Management expected challenges to persist into fiscal Q4, while reporting sequential improvement and efforts to build inventory.
- Inflation in materials, freight and other costs was expected to continue into fiscal Q4. Pricing, premiumization and cost savings were intended to mitigate pressure, but might not fully offset it.
- Coty was winding down its Russian operations. It expected up to $7.5 of additional costs and $15–$25 of future net cash costs funded by the Russian subsidiary; liquidation may take an extended period.
- The Lacoste fragrance license was scheduled to terminate early on June 30, 2023. Coty had received an advance of approximately $55.6, recorded as deferred income pending the termination date.
- Debt exposure includes variable-rate borrowings; 34% of debt was variable rate at quarter-end. Coty reported compliance with its credit-agreement covenants. The credit agreement’s leverage covenant limit was 4.00 to 1.00 for the applicable period.
- Common dividends remained suspended; management expected suspension until net debt to adjusted EBITDA reached 2x. Cash dividends on Series B preferred stock continued, subject to board declaration. No common shares were repurchased in the quarter.
- Contingencies include Brazilian tax assessments, including substantial disputed claims; Coty said it believed it had meritorious defenses and had not accrued a loss because it did not consider a loss probable. A Delaware stockholder case had a proposed settlement awaiting court approval; the company said an approved settlement was not expected to materially affect results.
Important facts for investors to verify
- Whether fiscal 2023 revenue guidance and the expected recovery in order fill rates were achieved, and how pricing, volume and currency affected subsequent results.
- How much earnings and cash flow depend on non-operating Wella valuation changes and forward-repurchase-contract fair-value gains; Wella is a Level 3 fair-value investment.
- Whether inventory growth and weaker operating cash flow convert into improved cash generation, and whether liquidity remains adequate relative to current liabilities and upcoming debt maturities.
- Progress and cash costs of the Russia wind-down, and completion and accounting treatment of the Lacoste license termination.
- Developments in Brazilian tax disputes, the Delaware litigation settlement, and the company’s ability to meet debt covenants while managing variable-rate exposure.