Coty (COTY) Stock Slips 15% Despite Q2 Earnings & Sales Beat

Coty Inc.’s COTY shares tumbled 15.1% on Feb 9 following its second-quarter fiscal 2021 results, wherein both top and bottom lines declined year over year – reflecting prevalent hurdles related to the coronavirus pandemic. The company’s travel retail network has been particularly hit by the pandemic, with the second wave posing further challenges. Also, reduced make-up usage due to fewer social occasions has been weighing on the mass category, while the prestige category saw considerable sequential improvement.

During the fiscal second quarter, both earnings and revenues came in ahead of the Zacks Consensus Estimate. Robust e-commerce momentum and gains from innovative product launches have been working in favor of the company. Also, focus on cost reductions has been aiding the company. Notably, Coty is progressing well with its strategic priorities, which includes digital and e-commerce growth.

E-commerce sales surged 40% during the reported quarter. Management remains pleased with the second-quarter show and said that the company’s January trends are also in tandem with its anticipations.

Quarter in Detail

Results from continuing operations reflect the total company results, excluding revenues and costs that are directly associated with the Wella business, whose majority stake was divested to KKR KKR on Nov 30, 2020. However, continuing operations include some cost recoveries received for the month of December 2020 under the Wella transitional service agreement (or Wella TSA).

Coty Inc. Price, Consensus and EPS Surprise

Coty Inc. price-consensus-eps-surprise-chart | Coty Inc. Quote

Coty’s adjusted earnings per share came in at 17 cents, which slumped 37% from 27 cents reported in the year-ago period. This includes only two months of the Wella business contribution. The Zacks Consensus Estimate for the quarter under review was pegged at 8 cents per share.

Coty’s net revenues from continuing operations came in at $1,415.6 million, which decreased 15.9% year over year. Nonetheless, the top line outpaced the Zacks Consensus Estimate of $1,402 million. Currency translations had a 0.5% adverse impact on the top line.

LFL net revenues from continuing operations slid 17.9%. LFL revenues were down across all regions and channels. Notably, the LFL mass business revenues saw a 21.6% decline and the prestige business was down 15.6%, with the latter indicating a sharp improvement from a 25% drop in the preceding quarter.

Adjusted gross margin from continuing operations declined from 62.4% to 58.7%, thanks to reduced sales volumes, and adverse regional and category sales mix.

Adjusted operating income from continuing operations came in at $188.4 million, up 7% year over year on robust fixed cost curtailments (including people and non-people expenses), along with solid marketing expense management. Fixed cost savings for the fiscal second quarter came in at about $80 million. Adjusted operating margin for continuing operations expanded 280 basis points to 13.3%.

Adjusted EBITDA (from continuing operations) for the quarter came in at $284.1 million, up 6% year over year. Adjusted EBITDA margin expanded 420 basis points to 20.1%.

Channel-Wise Details (From Continuing Operations)

Prestige: Net revenues in the segment fell 11.1% to $903.7 million, while LFL revenues declined 15.6%. Reported sales benefited from the addition of Kylie Beauty sales during the quarter under review. Half of the decline in the segment was accountable to the prevalent pressure in travel retail.

Nonetheless, sales trends improved sequentially even amid greater coronavirus waves, which resulted in various market closures or increased limitations on non-essential stores. This sequential improvement came on the back of therobust retail sales momentum in China and the United States, as well as broad-based e-commerce growth. Impressively, e-commerce sales surged 40% year over year.

Mass: Net revenues declined 23.3% year over year to $511.5 million, while LFL sales fell 21.6%. Sales continued to bear the brunt of reduced demand for color cosmetics due to lesser make-up usage occasions and lower store traffic amid the increased waves of the pandemic. On the brighter side, e-commerce sales remained strong, growing double digits. E-commerce sales were backed by continued growth at retailer sites as well as robust performance on Amazon AMZN — in the United States, Germany and U.K.

Segment Results (from Continuing Operations)

Net revenues in the Americas tumbled 7.2% to $539.5 million. LFL revenues were down 7.4% due to major hurdles in the travel retail channel. Excluding the travel retail impact, LFL revenues declined in mid single-digits. Reported sales were aided by contribution from the joint venture with Kylie Jenner. Notably, e-commerce sales surged more than 50% in the region, thanks to strength in prestige as well as mass categories.

This, in turn, was powered by solid execution at e-retailers, brick & click as well as direct-to-consumer with philosophy.com. As a percentage of sales, e-commerce penetration elevated to the low teens.

Sales in EMEA dropped 21.9% (down 24.8% at LFL) year over year to $708.9 million. Sales trends were impacted by the second coronavirus wave and the multiple market lockdowns. E-commerce sales soared about 30% in the quarter, and e-commerce penetration, as a percentage of sales went up to the mid-20s percentage range.

Sales in the Asia-Pacific region declined 13.9% (down 17.2% at LFL) year on year to $167.2 million, with most of the LFL revenue decline being accountable to the travel retail softness. Also, continued active sales reduction to channels with low value contributed to this decline to some extent. Nonetheless, LFL trends improved considerably on a sequential basis. E-commerce sales saw more than a 20% increase, somewhat affected by a continued decline in low value sales.

Other Financial Updates

Coty, which shares space with Nu Skin NUS, ended the second quarter with cash and cash equivalents of $549.1 million, as well as immediate liquidity of $2,832.1 million.

The company’s financial net debt of $4,842.6 million as of Dec 31, 2020 fell from $7,864.5 million as of the end of the preceding quarter (Sep 30). The reduction in net debt was accountable to gross proceeds from Wella’s sale, along with robust free cash flow — somewhat negated by currency headwinds.

During the second quarter, Coty generated cash from operations of $430.1 million. Operating cash flow for the first half of fiscal 2021 came in at $472.7 million. Free cash outflow during the second quarter and the first half was $389.4 million and $361.1 million, respectively.

Key Things to Note

On Jan 27, Coty unveiled the planned shutdown of its manufacturing site in Cologne, Germany — as part of the company’s consolidation of the global fragrance operations. The shutdown, anticipated to be concluded by Summer 2022, is likely to take place in stages. Further, on Jan 5, Coty concluded the buyout of a 20% stake in Kim Kardashian West's business.

Despite the adverse impacts of the pandemic on sales channels and short-term orders, the company is focused on its core priorities, as well as enhancement of its sell-out trends. The company said that it will begin increasing its commercial investments to aid improvements before fiscal 2022. Coty anticipates these actions to be backed by fixed cost savings, which are now likely to reach roughly $300 million for fiscal 2021 compared with more than $200 million expected before.

The raised savings goal can be accountable to robust delivery in the first half and acceleration of various projects. This, in turn, is likely to lead to adjusted EBITDA of $750 million for fiscal 2021. Certainly, Coty’s robust cost discipline and cash-flow dynamics remain its main drivers.

Shares of the Zacks Rank #3 (Hold) company have rallied 45.6% in the past three months compared with the industry’s growth of 14.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Just Released: Zacks’ 7 Best Stocks for Today

Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.9% per year.

These 7 were selected because of their superior potential for immediate breakout.

See these time-sensitive tickers now >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Amazon.com, Inc. (AMZN) : Free Stock Analysis Report

Nu Skin Enterprises, Inc. (NUS) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research