COTY's Q2 Earnings Miss, Lower Revenues Across Segments Hurt

Coty Inc. COTY posted soft second-quarter fiscal 2025 results, with the top and bottom lines declining year over year and missing the Zacks Consensus Estimate. The macroeconomic environment remains challenging.However, consumers prioritize beauty spending, with fragrances remaining a top-performing category in the beauty industry. While Coty faces headwinds in markets like the Chinese mainland, Asia Travel Retail channel and the U.S. mass cosmetics, it remains at the forefront of driving growth through innovative product launches, improved formulations and engaging marketing campaigns.In the fiscal second quarter, Coty delivered adjusted earnings of 11 cents per share, which missed the Zacks Consensus Estimate of 22 cents. Also, the bottom line declined from earnings of 25 cents per share reported in the year-ago quarter.Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.Coty’s net revenues were $1,669.9 million, down 3% year over year. The metric reflected a 2% adverse impact from unfavorable foreign currency exchange. Quarterly net revenues missed the Zacks Consensus Estimate of $1,715 million. Further slowing of the mass beauty market, mainly color cosmetics, along with persistent headwinds in the APAC region, particularly China, Travel Retail Asia and Australia, hurt sales. However, the global fragrance market was solid. The expected sell-out for the company’s prestige fragrance portfolio increased at a high single digit percentage in the first half of the fiscal year. Coty Price, Consensus and EPS Surprise Coty price-consensus-eps-surprise-chart | Coty QuoteOn a like-for-like (LFL) basis, Coty’s net revenues dipped 1%. However, this was offset by about a 1% contribution from Argentina, which faced hyperinflation.A Closer Look at COTY’s Q2 ResultsCoty witnessed robust consumer demand in its e-commerce business, accounting for nearly 20% of its sales. The e-commerce sell-out in both the Prestige and Consumer Beauty businesses increased in double digits percentage in the fiscal second quarter.  Coty is benefiting from market share across various brands including Burberry and Marc Jacobs in Prestige, and CoverGirl, Sally Hansen and Nautica in Consumer Beauty. These highlight the company's robust digital capabilities and brand relevance. However, Coty’s e-commerce sell-in fell, due to the majorly lagging sell-out growth in Prestige and Consumer Beauty owing to the tight order management by e-retailers.The adjusted gross margin was 66.8%, expanding 170 basis points (bps). Reported gross margin increased 160 bps to 66.7%, backed by supply-chain savings with procurement savings and productivity benefits, obsolescence reduction, pricing gains and disciplined promotional activity.Coty reported an adjusted operating income of $333.7 million, an 8% increase from the prior year’s level. The company's adjusted operating margin was 20%, expanding 210 bps year over year. This growth in operating margin was attributed to the strong expansion of gross margin and lower fixed costs.The adjusted EBITDA of $390.7 million rose 7% year over year. The adjusted EBITDA margin was 23.4%, reflecting an increase of 220 bps.Q2 Insights of COTY’s SegmentsPrestige: Net revenues in the segment totaled $1,116.1 million, accounting for 67% of total company sales. This represents a 1% drop on a reported basis, including a 1% headwind from foreign exchange and a 1% adverse impact from the Lacoste license’s divestiture. Despite the robust sell-out in the company’s prestige fragrances, reported net revenues were hurt by major challenges in China and Travel Retail Asia, along with tight inventory management and weaker-than-expected replenishment orders by retailers in the United States, Europe and Australia. On an LFL basis, revenues inched up 1%, buoyed by increases in Coty's prestige fragrance category, somewhat offset by prestige cosmetics. The segment's adjusted operating income was $260 million, up 8.8% from $239 million reported in the year-ago quarter. The adjusted operating margin was 23.3%, up 200 bps year over year.The Prestige fragrance category continues to outpace the beauty market, increasing in high-single-digit percentage in the reported quarter. Sell-out for its prestige fragrance portfolio rose by high single-digit percentage level of the high baseline year over year while sell-in was much lower as Coty was impacted by a major gap between sell-in and sell-out. This gap was mainly prevalent in the Chinese mainland, due to immense pressure on the beauty market and the United States, Europe and Australia related to tight management of inventories. The company continued to grow its Burberry Goddess franchise, which aided the brand's double-digit percentage reported net revenue rise. Robust momentum in Hugo Boss helped the brand become the #2 male fragrance brand in Europe, rising one spot from the year-ago period. Prestige cosmetics revenues dipped in the quarter, due to persistent weakness in the Chinese mainland and the Asia Travel Retail channel.Coty expanded its brand portfolio with the signing of a beauty license with a famous crystal house Swarovski. Under the agreement, the company will develop, make and distribute a new vision of fragrances. Swarovski Crystal Business is represented in more than 140 countries worldwide with 2,300 Swarovski boutiques, complemented by few multi-brand partners. The first offering is likely to launch in 2026.Consumer Beauty: Net revenues amounted to $553.8 million, accounting for 33% of total sales. This represents an 8% decline on a reported basis, hurt by a 4% headwind from foreign exchange. Lower revenues in color cosmetics and body care were somewhat offset by growth in mass fragrance. Its Consumer Beauty sell-out was below the broader mass beauty market owing to its higher exposure to the immensely pressured mass color cosmetics category. Also, Coty's sell-in has been tracking below the sell-out, led by pressures on U.S. mass retailers due to ongoing channel shifts, inventory management at retailers in Australia and parts of Europe, and increased trade investments. On an LFL basis, sales fell 4%. The segment's adjusted operating income was $73.7 million, up 4.8% from $70.3 million reported in the year-ago quarter. The adjusted operating margin was 13.3%, up from 11.6%.The global mass beauty market growth slowed to a low-single-digit pace, below the peak ~10% growth level seen in fiscal 2024, benefiting from inflation-related pricing. The mass fragrance category rose at a mid-single-digit percentage in the reported quarter, outperforming the broader mass beauty market. Sales in Coty's mass color cosmetics business were down while the broader mass color cosmetics category remained flat in the quarter, as the U.S. mass beauty retailers were pressured by the channel shits. Retailers in Australia and Europe have also been tightly managing the inventory levels.Coty has been making continued investments in its skincare strategy. Lancaster registered a double-digit percentage net revenue increase in the fiscal second quarter, backed by the launch of its Golden Lift skincare variety and the brand's positioning as a photo-aging prevention and repair expert. While Philosophy leans into the social media advocacy strategy, Orveda enhanced its footprint by introducing the La Maison Orveda in New York City and Paris.Regional Revenue Results for COTYCoty’s Americas segment reported net revenues of $638.6 million, accounting for 38.2% of total sales. This represents a 7% decline on a reported basis, due to sluggishness in the color cosmetics market across the United States and weak body care revenues in Brazil. On an LFL basis, Americas net revenues fell 1%, with a 3% contribution from Argentina, which experienced hyperinflation.Coty’s EMEA segment generated net revenues of $839.8 million, accounting for 50.3% of total sales. This represents a 2% increase on a reported basis, driven by increases across numerous European markets, comprising the United Kingdom, Ireland, Spain and Portugal, along with solid growth in Africa and the addition of an export distributor. On an LFL basis, EMEA net revenues grew 2% in the fiscal second quarter.Coty’s Asia Pacific segment reported net revenues of $191.5 million, representing 11.5% of total sales. This marks an 11% decline on a reported basis on lower revenues stemming from tough dynamics affecting the market in the Chinese mainland and the regional Travel Retail channel, further led by major retailer inventory reduction. On an LFL basis, Asia Pacific net revenues also declined 11%.Coty's growth engine markets net revenues, reflecting nearly 21% of total sales in the first half, dipped 2% on a reported basis and rose 9% on an LFL basis, backed by strength in LATAM, Brazil, Africa, Southeast Asia, including India, and North Asia. LFL growth reflects a 5% contribution from Argentina.COTY’s Financial Health SnapshotThis Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $249.6 million and net long-term debt of $3,387 million. For the six months ended Dec. 31, 2024, cash provided by operating activities amounted to $531.9 million.On Nov. 20, 2024, the company declared the early results of its earlier-announced tender offer to buy for cash up to $300 million of its outstanding 5.000% Senior Secured Notes due 2026.What to Expect From Coty in FY25Year-to-date through the fiscal second quarter, the beauty market has been growing at a healthy pace. However, growth has moderated from the outsized levels in the past few years. Prestige fragrances have been an outperforming category in beauty. Mass beauty has moderated from high-single digit percentage growth in fiscal 2024 to low single digits in the reported quarter, including flat performance in the mass cosmetics category. Further, the APAC region has been pressured owing to the persistent headwinds in China and Travel Retail Asia. Also, key retailers have been tightly managing orders and inventory levels, due to major channel shifts in U.S. mass beauty.  Consequently, management expects LFL sales trends in the second half of fiscal 2025 to be broadly consistent with the reported quarter’s LFL sales trend at a negative 1% to a negative 2%. Significant strengthening of the U.S. dollar is likely to drive a more material foreign exchange headwind of nearly 3% in the second half, resulting in the fiscal year’s reported sales declining in low single-digits percentage.Given a dynamic retail demand backdrop, COTY assumes a broadly similar market landscape entering fiscal 2026. However, many key brand initiatives and distribution opportunities expected for fiscal 2026 will aid few gradual improvements in the company’s LFL sales growth.Given the uncertain beauty market backdrop, Coty acts with agility, with robust cost-saving initiatives, promotional discipline and protection of its cash flow. Management projects savings of more than $120 million for fiscal 2025, with further savings in fiscal 2026 and beyond. Coty projects robust gross margin expansion in the current fiscal year, backed by robust gross margin improvement in the first half.Coty estimates adjusted EBITDA margin expansion of 70-90 bps in the second half of fiscal 2025, higher than the 30-bps adjusted EBITDA margin expansion in the prior year. This implies adjusted EBITDA increasing in the low-single digits to the range of $1,115-$1,125 million, including a low-to-mid single digit headwind from foreign exchange.The company envisions fiscal 2025 adjusted EPS, excluding the equity swap of 50-52 cents, to represent mid-to-high single digit percentage growth. This includes a nearly 4% negative impact from the discrete tax benefits seen in the prior year. It forecasts free cash flow to increase about 10% year over year to approximately $400 million in the current fiscal year.The company targets a year-over-year reduction in leverage exiting CY25 of 0.5x or higher, leading to leverage below 2.5x, with a goal to reach closer to 2x. This factors in the cash true-up payment related to Coty's equity swap.Shares of COTY have lost 9.4% in the past three months compared with the industry’s 8.8% decline.Stocks to Consider in Consumer Staples SpaceFreshpet, Inc. FRPT, a pet food company, has a trailing four-quarter average earnings surprise of 144.5%. FRPT currently sports a Zacks Rank #1 (Strong Buy). 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(FRPT): Free Stock Analysis Report McCormick & Company, Incorporated (MKC): Free Stock Analysis Report United Natural Foods, Inc. (UNFI): Free Stock Analysis Report Coty (COTY): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks