Coty Inc. — Form 10-Q Summary
Business context and period: Coty manufactures and sells beauty products globally across Luxury, Consumer Beauty and Professional Beauty. This unaudited report covers the three months ended September 30, 2019, Coty’s fiscal first quarter of 2020; comparisons are with the three months ended September 30, 2018. Amounts are in U.S. dollars, millions, except per-share data.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net revenues | $1,942.8 | $2,031.3 |
| Gross profit / margin | $1,204.4 / 62.0% | $1,222.2 / 60.2% |
| Operating income (loss) / margin | $126.0 / 6.5% | $(20.7) / (1.0)% |
| Adjusted operating income / margin (non-GAAP) | $154.7 / 8.0% | $140.8 / 6.9% |
| Net income (loss) attributable to Coty | $52.3 | $(12.1) |
| Diluted EPS | $0.07 | $(0.02) |
| Adjusted net income attributable to Coty (non-GAAP) | $50.5 | $80.5 |
| Net cash from operating activities | $39.9 | $(81.9) |
| Net cash used in investing activities | $(60.8) | $(174.4) |
| Net cash from financing activities | $36.7 | $351.8 |
- Revenue and segment trends: Revenue fell 4% reported. Excluding the Younique divestiture effect, revenue declined 3%, reflecting an 8% volume decrease and 2% adverse currency impact, partly offset by 7% favorable price and mix. Luxury revenue rose 2% to $806.7; Consumer Beauty fell 14% to $716.5; Professional Beauty rose 2% to $419.6.
- Profitability: GAAP operating income included an $84.5 gain on the Younique sale. Adjusted operating income increased 10%, but adjusted net income declined 37% and adjusted diluted EPS fell to $0.07 from $0.11. Net interest expense rose to $77.4 from $64.1.
- Cash and liquidity: Cash and cash equivalents were $350.4 at September 30, versus $340.4 at June 30; cash, cash equivalents and restricted cash totaled $381.4. Current assets of $3,132.7 were below current liabilities of $3,237.4. Operating cash flow improved by $121.8 year over year, aided by working-capital movements, lower restructuring payments and receivables factoring; these factors affect the quality and repeatability of the improvement.
- Debt: Total debt was $7,716.5, including $185.4 current and $7,453.5 long-term debt net of issuance costs and discounts. Long-term debt maturities include $4,171.0 in fiscal 2023. Coty reported compliance with debt covenants at quarter-end; the credit agreement’s total net leverage limit was 5.25:1 through December 2021. Operating lease liabilities totaled $554.4 and are excluded from the company’s covenant net-debt calculation.
Material changes and unusual items
- Younique was divested on September 16 for $50.0 cash and a secured promissory note with a $27.9 face value; Coty recorded an $84.5 pretax gain. The transaction materially affected GAAP operating income and earnings.
- Revenue weakness was concentrated in Consumer Beauty, amid North American shelf-space losses and deliberate reductions in lower-priced distribution in Latin America and the Middle East. Luxury and Professional Beauty benefited partly from resolved prior-year supply disruptions and launches.
- Gross margin improved about 180 basis points to 62.0%, while SG&A as a share of revenue was broadly flat at 55.2%. Coty increased working-media investment in color cosmetics.
- Foreign currency translation reduced other comprehensive income by $122.6; comprehensive loss attributable to Coty was $72.3.
- Coty adopted lease accounting on July 1, 2019, recognizing a $617.8 lease liability and a $551.3 right-of-use asset, with minimal reported-period income-statement impact.
Outlook, management commentary and risks
- Management’s four-year Turnaround Plan aims to stabilize and gradually accelerate revenue growth, improve margins and control costs, and reduce debt. Coty cited early signs including improved gross margin, share gains for selected brands, and decelerating declines in priority Consumer Beauty brand-country combinations.
- Coty expects approximately $600.0 of incremental cash costs related to the Turnaround Plan. It also expects approximately $30.0 of additional restructuring charges over the next four fiscal years for approved actions; these are distinct from the broader expected cash costs.
- On October 21, 2019, Coty announced a strategic review of alternatives, including potential divestiture, for Professional Beauty, associated Consumer Beauty hair brands, and Brazilian operations. Any proceeds are expected to be used to reduce debt and return excess cash to shareholders; no transaction or proceeds are assured.
- Management cited execution complexity from implementing multiple initiatives, organizational changes and a planned Amsterdam headquarters move. Key risks include persistent Consumer Beauty underperformance, consumer and retail-channel shifts, foreign exchange, supply-chain disruption, debt and covenant constraints, and the uncertain outcome of strategic reviews and litigation.
- Brazilian tax assessments totaled approximately $59.8, including estimated interest and penalties. Coty disputes the assessments and recorded no loss because it did not consider a loss probable. Stockholder litigation concerning the Cottage tender offer remained pending in Delaware; one federal complaint had been dismissed with prejudice.
- A quarterly dividend of $0.125 per share was announced after quarter-end, payable December 27, 2019; shareholders could elect to receive 50% in cash and 50% in stock.
Important facts for investors to verify
- Whether Consumer Beauty’s revenue and operating performance improve, and whether early turnaround indicators persist.
- How much reported earnings and cash flow depend on the Younique gain, receivables factoring, and working-capital timing; compare GAAP results with non-GAAP measures.
- Progress, costs, timing and potential proceeds from the strategic review and Turnaround Plan, including debt reduction.
- Debt maturities, covenant headroom, interest expense and liquidity, including the effects of lease obligations and seasonal cash needs.
- Developments in Brazilian tax proceedings, tender-offer litigation, and risks associated with substantial goodwill and intangible assets.