Business context and reporting period
Coty Inc. is a global beauty company selling fragrance, color cosmetics, skincare and body-care products. This unaudited Form 10-Q covers the three and six months ended December 31, 2022, the second quarter and first half of fiscal 2023. Comparisons are with the corresponding prior-year periods; dollar amounts are U.S. dollars in millions unless stated otherwise.
Key financial metrics
| Metric | Three months ended Dec. 31, 2022 | Prior year | Six months ended Dec. 31, 2022 | Prior year |
|---|---|---|---|---|
| Revenue | $1,523.6 | $1,578.2 | $2,913.6 | $2,949.9 |
| Gross profit / margin | $998.3 / 65.5% | $1,017.1 / 64.4% | $1,887.0 / 64.8% | $1,884.0 / 63.9% |
| Operating income / margin | $199.3 / 13.1% | $244.0 / 15.5% | $371.2 / 12.7% | $261.2 / 8.9% |
| Adjusted operating income / margin (non-GAAP) | $261.4 / 17.2% | $236.3 / 15.0% | $511.0 / 17.5% | $436.8 / 14.8% |
| Adjusted EBITDA / margin (non-GAAP) | $317.6 / 20.8% | $311.9 / 19.8% | $625.5 / 21.5% | $590.4 / 20.0% |
| Net income attributable to Coty Inc. | $238.3 | $261.4 | $366.9 | $487.4 |
| Net income attributable to common stockholders | $235.0 | $192.7 | $360.3 | $295.7 |
| Diluted EPS | $0.27 | $0.23 | $0.42 | $0.36 |
First-half operating cash flow was $645.4, versus $734.7 a year earlier; capital expenditures were $102.1, versus $86.0. Investing activities used $45.2, compared with $74.5 provided in the prior period. Financing activities used $536.6, compared with $547.5. Cash and cash equivalents were $280.8 at December 31, 2022, with an additional $31.5 of restricted cash.
Total debt was $4,137.9, including $68.1 current debt; long-term debt, net, was $4,014.0. Debt declined from $4,498.5 at June 30, 2022. Current assets were $1,906.3 and current liabilities $2,915.6. Coty said it was in compliance with its credit-agreement covenants at quarter end. The filing does not state the actual covenant leverage ratio.
Material changes versus prior comparable periods
- Second-quarter revenue fell 3%; management attributed the decline to a 7% foreign-exchange headwind, 5% lower unit volume and the Russia exit, partly offset by 9% favorable price and mix. First-half revenue fell 1%, with 7% FX headwind and 2% lower volume partly offset by 8% favorable price and mix.
- Second-quarter Prestige revenue decreased 5% and Consumer Beauty revenue decreased 1%. For the first half, Prestige revenue declined 3%, while Consumer Beauty grew 2%.
- Gross margin improved 110 basis points in Q2 and 90 basis points for the first half, supported by pricing and cost efficiencies, partly offset by product mix, inflation and freight costs.
- Reported Q2 operating income declined 18%, in part because the prior-year quarter included a $91.7 real-estate gain. First-half reported operating income increased 42%, despite a prior-year real-estate gain of $92.7. Adjusted operating income and adjusted EBITDA increased in both periods; these are non-GAAP measures.
- Net income attributable to Coty Inc. declined in both comparisons, principally reflecting smaller favorable Wella investment fair-value gains than in the prior year. The effects of preferred-stock dividends and other adjustments mean common-stockholder net income moved differently.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2023 revenue growth in the mid-to-high single digits, excluding foreign exchange and the Russia exit. This is company guidance, not a guarantee.
- Component shortages and transportation delays continued to constrain order fill rates, particularly for Prestige fragrances; management expected challenges to persist through the remainder of fiscal 2023. Inflation in materials, logistics and other costs was also expected to continue. Pricing, portfolio premiumization and cost savings were intended to mitigate these pressures, but might not fully offset them.
- Coty had substantially completed commercial activity in Russia but expected liquidation of the legal entity to take an extended period. It anticipated up to $8.0 of additional wind-down costs and future net cash costs of $30–$35, to be funded by the Russian subsidiary; amounts remain subject to regulatory and legal developments. The quarter included a $16.8 pre-tax Russia-related gain, primarily from releasing a bad-debt accrual after better-than-expected collections.
- Coty agreed to early terminate the Lacoste fragrance license effective June 30, 2023 in exchange for termination payments. It received an advance of €52.5 million (approximately $55.6), recorded as deferred income until the termination takes effect.
- The Wella investment was carried at $1,040.0, up from $830.0 at June 30, 2022, including a $210.0 fair-value gain recognized in earnings for the first half. The valuation uses Level 3 unobservable inputs, so reported earnings are exposed to valuation assumptions.
- Variable-rate debt was 31% of total debt; Coty said 63% of variable-rate debt was hedged. Higher interest rates and the possible expiration of swaps could increase interest costs. First-half net interest expense rose to $126.9 from $120.7.
- Common-stock dividends remained suspended; management expected the suspension to continue until net debt to adjusted EBITDA reaches 2x, subject to the Board’s discretion. Coty continued cash dividends on Series B preferred stock. No common shares were repurchased in the quarter, although forward repurchase contracts relate to potential buybacks in 2024 and 2025.
- Brazilian tax assessments remained in administrative proceedings. Coty reported a belief that its defenses were meritorious and had not accrued a loss because it did not consider a loss probable; it had surety bonds of approximately $80.2. The filing also discusses ongoing litigation, including a tender-offer case with an agreement in principle to resolve it, and other legal and compliance risks.
Most important facts for investors to verify
- Whether revenue guidance is being achieved, especially after adjusting for FX and the Russia exit, and whether Prestige fragrance supply constraints ease.
- How much reported and adjusted margin improvement reflects sustainable pricing, mix and cost savings versus reduced advertising, unusual gains or other exclusions.
- The cash-flow and working-capital trend, including receivables factoring, inventory growth and the seasonal effect of holiday sales.
- Debt reduction, variable-rate exposure, upcoming maturities and covenant headroom; the filing does not provide a clear actual leverage ratio.
- Wella’s carrying value and fair-value assumptions, and the sensitivity of Coty’s reported earnings to that investment.
- The final costs and timing of the Russia wind-down, Lacoste termination payments, Brazilian tax assessments and material legal proceedings.