Coty Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2021. Coty sells fragrance, color cosmetics, and skin and body care products globally. Unless stated otherwise, financial amounts are U.S. dollars in millions. Comparisons are with the corresponding prior-year periods.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net revenue | $1,578.2, up 12% | $2,949.9, up 16% |
| Gross profit / margin | $1,017.1 / 64.4%, versus 58.7% | $1,884.0 / 63.9%, versus 58.7% |
| Operating income / margin | $244.0 / 15.5%, versus $17.0 / 1.2% | $261.2 / 8.9%, versus a $49.0 loss / (1.9)% |
| Adjusted operating income / margin (non-GAAP) | $236.3 / 15.0%, up 16% | $436.8 / 14.8%, up 51% |
| Adjusted EBITDA / margin (non-GAAP) | $311.9 / 19.8%, up 10%; margin declined from 20.1% | $590.4 / 20.0%, up 31%; margin improved from 17.8% |
| Net income from continuing operations | $259.9, versus a $19.0 loss | $488.8, versus $103.6 |
| Net income attributable to Coty | $261.4, versus a $252.3 loss | $487.4, versus a $30.9 loss |
| Basic EPS | $0.23, versus $(0.36) | $0.36, versus $(0.10) |
Revenue growth reflected recovering store traffic and travel, successful Prestige launches, e-commerce growth, and price and mix. In the quarter, Prestige revenue rose 12% and Consumer Beauty 11%; for the six months, they rose 21% and 8%, respectively. Six-month revenue growth comprised 5% higher volume and 11% favorable price and mix.
Gross-margin gains reflected higher-margin product mix, pricing, lower inventory obsolescence, and reduced promotional allowances, partly offset by higher material costs. SG&A rose 12% in the quarter and 22% for the six months, including increased advertising and promotional spending and higher share-based compensation.
Cash flow, debt, and liquidity
- Operating cash flow for the six months was $734.7, versus $472.7 a year earlier. Capital expenditures were $86.0.
- Cash and cash equivalents were $523.4 at December 31, 2021; restricted cash was $39.1. Current assets of $2,178.4 were below current liabilities of $2,902.1.
- Total debt was $4,977.6, including $4,878.5 of long-term debt, net. Debt declined from $5,481.5 at June 30, 2021. Management said it believed cash on hand, liquidity, and covenant headroom were sufficient for foreseeable operating and recurring cash needs.
- Coty issued $500 million of 4.75% secured notes due 2029 and replaced prior revolving commitments with a $2.0 billion revolving facility due 2025. No revolving borrowings were outstanding at quarter-end. The company reported compliance with its debt covenants.
- The company continued to suspend common-stock dividends, stating it expected the suspension to continue until net debt to Adjusted EBITDA reached 4x. KKR’s exit from Coty’s Series B preferred stock through conversions and exchanges was expected to reduce annual preferred dividend obligations by about $77 million.
Material changes and unusual items
- Reported earnings included substantial gains from Coty’s retained Wella investment: $128.3 for the quarter and $518.3 for the six months, primarily from realized and unrealized fair-value changes. These gains significantly affected GAAP net income and are excluded from Coty’s adjusted measures.
- A real-estate sale generated a $91.7 gain in the quarter and $92.7 for the six months. Six-month share-based compensation was $138.0, including $124.0 related to the CEO’s sign-on award.
- Coty’s Wella ownership fell from 40% to 25.9% through exchanges for redemption of KKR’s Series B preferred stock. Coty received a $34.0 advance relating to possible future Wella tax-credit proceeds; it remains a liability and is subject to clawback if recovery targets are not met.
- The prior-year comparison includes Wella operating results as discontinued operations and a $235.6 discontinued-operations loss for the quarter, including a loss on sale. The current-period discontinued-operations income of $3.8 reflects purchase-price working-capital adjustments, not ongoing Wella sales.
- Series B preferred stock dividends and deemed dividends reduced income available to common stockholders. Coty recorded $191.7 of preferred dividends for the six months.
Outlook, commentary, and risks
- Management expected fiscal 2022 reported revenue growth at the upper end of its low-to-mid-teens range, excluding foreign exchange. It expected full-year gross margin to improve versus the prior year, but second-half margin to be below first-half margin due to seasonality.
- Management said inflation and global supply-chain challenges were expected to be more material headwinds in the second half. Selective price increases and other mitigations may not fully offset their effects.
- COVID-19 recovery remained uneven, with restrictions and travel disruption affecting some markets. Coty cautioned that recovery and consumer trends could remain nonlinear.
- The Transformation Plan aims to support growth, margins, cost control, and deleveraging. Coty expected approximately $65 million of additional restructuring charges over the next two fiscal years for approved actions. Management noted execution complexity, including the Wella transition-services wind-down.
- Material risks include demand and market shifts, product-launch execution, supply-chain disruption and inflation, foreign exchange, debt service and refinancing, valuation uncertainty in the Level 3 Wella investment, and legal and tax matters. Brazilian tax assessments remained under administrative challenge; Coty said it believed its defenses were meritorious and had not accrued a loss because it did not consider a loss probable. A Delaware stockholder lawsuit was in discovery with trial scheduled for November 2022.
Important facts for investors to verify
- How much operating improvement is recurring versus driven by the Wella fair-value gain and real-estate sale, and how adjusted results reconcile to GAAP.
- Whether revenue and gross-margin momentum persists as pandemic comparisons normalize and inflation, promotions, and supply costs evolve.
- Debt reduction, refinancing costs, covenant headroom, and the timing and amount of cash available for debt service.
- The valuation assumptions and sensitivity of Coty’s remaining Wella stake, and the conditions and potential clawback associated with the $34.0 advance.
- Progress and costs under the Transformation Plan, the TSA wind-down, and resolution of Brazilian tax assessments and pending litigation.