Is Coty Inc. headed for a recovery? An In-Depth Look at the Numbers

Coty is one of the world’s largest beauty companies with over $9 billion in revenue, an iconic portfolio of brands and a purpose of celebrating and liberating the diversity of consumers’ beauty.

On Nov 7th, Coty Inc. announced financial results for the first quarter of the fiscal year 2019, ended September 30, 2018. The company reported disappointing results due to the supply chain disruptions it had experienced over the last quarter and the resulting poor Q1 financial performance. While the company had anticipated some level of disruption in the first quarter from warehousing and planning consolidation, the increased scope of the disruptions resulted in much weaker results than previously expected.

Notwithstanding these temporary setbacks, the fundamentals of the company continues to remain robust and the management is working hard to remedy the supply chain issues and expect to temper the headwinds in the second quarter, and have them be substantially resolved in the third quarter, although Coty do not expect to fully recover the Q1 financial impact in the balance of fiscal 2019. As a result of these disruptions, the company has decided to modify its distribution center consolidation plan for the remainder of the year to minimize business impact. With a healthy synergy delivery, already in Q1, these modifications should have no impact to Coty’ commitment of $225 millions of synergies in fiscal 2019 and $750 millions of synergies by the end of fiscal 2020.

1Q19 reported net revenues of $2,031.3 million decreased 9.2%, with a like-for-like (LFL) revenue decline of 7.7% as Coty encountered several short supply chain-related headwinds. The company estimates these factors cumulatively negatively impacted LFL by approximately 5%, implying an underlying 1Q19 decline in the low single digits, with underlying declines limited to the Consumer Beauty division.

Specific supply chain headwinds included:

Management commentary:

“To conclude, 1Q19 was a disappointing setback in achieving our financial targets and strategic goals, and we are working hard to solve the issues. With the P&G Beauty integration near completion, and after we have overcome the internal challenges, we will be better equipped to focus more externally, so that we can fully capitalize on the exciting and dynamic changes in the beauty industry. We remain absolutely convinced that the fast-paced and ambitious transformational agenda we are pursuing, including comprehensive upgrades to our systems, processes, culture, and people, is ultimately building a much stronger Coty for the long term.”

Outlook over the near to medium term:

Looking to fiscal 2019, despite the supply chain headwinds, Coty continues to expect operating profit and margin growth in fiscal 2019, driven by significant progress in fixed cost reductions and synergy delivery. However, the company needs more time to assess the financial impacts of the continuing supply disruptions and, at this stage, management is not providing any further guidance, but expect to provide an update on its outlook on the next earnings call.

That being said, Deleveraging continues to remain the topmost priority in FY19 and beyond. The management remains committed to its target of achieving a Net Debt to adjusted EBITDA ratio of below 4.0x by the end of calendar 2020 and Coty expects positive free cash flow in the remaining quarters and in FY19. Furthermore, the company’s overall liquidity and financial flexibility are substantial, with significant flexibility from over $2 billion of revolver availability.

Analyst views and brokerage actions: Per, Their average twelve-month price target is $12.4091, suggesting that the stock has a possible upside of 64.58%. The high price target for COTY is $20.00, and the low-price target for COTY is $7.00. There are currently one sell rating, nine hold ratings and 5 buy ratings for the stock, resulting in a consensus rating of “Hold.”

Below are the excerpts of recent ratings by brokerage house:

About the Company: Coty is one of the world’s largest beauty companies with over $9 billion in revenue, an iconic portfolio of brands and a purpose of celebrating and liberating the diversity of consumers’ beauty. As the global leader in fragrance, a strong number two in professional salon hair color & styling, and number three in color cosmetics, Coty operates three divisions: Consumer Beauty, which is focused on mass color cosmetics, mass retail hair coloring and styling products, body care and mass fragrances with brands such as COVERGIRL, Max Factor, Bourjois and Rimmel; Luxury, which is focused on prestige fragrances and skincare with brands such as Calvin Klein, Marc Jacobs, Hugo Boss, Gucci and philosophy; and Professional Beauty, which is focused on servicing salon owners and professionals in both hair and nail, with brands such as Wella Professionals, Sebastian Professional, OPI and ghd. Coty has 20,000 colleagues globally, and its products are sold in over 150 countries. Coty and its brands are committed to a range of social causes as well as seeking to minimize its impact on the environment.

Financial results:

Q3 Financial Highlights

  • 1Q19 reported net revenues of $2,031.3 million decreased 9.2%, with a like-for-like (LFL) revenue decline of 7.7% as Coty encountered several temporary supply chain-related headwinds. The company estimates these factors cumulatively negatively impacted LFL by approximately 5%, implying an underlying 1Q19 decline in the low single digits, with underlying declines limited to the Consumer Beauty division.

Specific supply chain headwinds included:

  • Warehouse and planning center consolidation disruptions in Europe and the U.S., which impacted all three divisions;
    • Component shortages from certain external suppliers, which impacted Luxury; and
    • The U.S. Hurricane Florence in the second half of September, which significantly impacted Coty’ manufacturing plant and distribution center in North Carolina, which primarily impacted the Luxury division.

Gross Margin

  • 1Q19 reported a gross margin of 60.2% decreased by 70 bps from the prior-year period, while the adjusted gross margin of 60.4% decreased by 120 bps, primarily driven by the impact of supply chain disruptions, including higher freight costs, on both Consumer Beauty and Luxury.

Net Income:

  • 1Q19 reported net loss of $12.1 million improved from a loss of $19.7 million in the prior year, while the adjusted net income of $80.5 million grew 6% from $76.3 million in the prior year, primarily due to a $32 million tax benefit in the quarter, coupled with lower interest expense, tied to higher EUR borrowings in 1Q19.

Operating Cash Flow & Net Debt:

  • In 1Q19, net cash provided by operating activities was $(81.9) million, down from $(8.9) million in 1Q18 primarily driven by continued pressures on working capital, largely connected to the supply chain disruptions, as well as an increase in integration and restructuring cash costs of over $15 million to approximately $140 million in 1Q19.
  • Coty’ 1Q19 free cash flow of $(215.5) million decreased from $(120.3) million in the prior year, driven primarily by the reduction in operating cash flow.
  • Net debt of $7,661.3 million on September 30, 2018, increased by $369.7 million from the balance of $7,291.6 million on June 30, 2018, resulting in a last twelve months Net debt to adjusted EBITDA ratio of 5.8x compared with June 30, 2018 ratio of 5.3x.

Risk Factors & Stock Influences:

  1. As the company will overcome the internal supply headwinds and complete all other major integration-related milestones, Coty will increasingly shift its focus from being largely internal to fully external and will be able to see improved performance across all the areas.
  2. The Company’ liquidity position is substantial, with significant flexibility from over $2 billion of revolver availability.
  3. The company’ mid-term goals remain one of delivering consistent, modest net revenue growth with continuous margin expansion. This, coupled with its dividend payout should drive a superior total shareholder return.
  4. The company faces competition in all aspects of its business. Therefore, in this competitive landscape, the company’s ability to sustain revenue growth while improving profitability would remain a key stock sensitivity factor. 
  5. The company operates in a rapidly changing fast paced industry.  Therefore, it must continue to launch, innovate and enhance products to maintain its substantial market share.

Stock Performance

  • On Friday, Feb 2nd, 2019, COTY closed at $7.54, with a robust average volume of 11.292 million shares exchanging hands. Market capitalization is $5.663 billion. The current RSI is 53.75
  • In the past 52 weeks, shares of COTY have traded as low as $5.91 and as high as $21.68
  • At $7.54, shares of COTY are trading above its 50-day moving average (MA) at $7.45 and below its 200-day moving average (MA) at $11.40

The present support and resistance levels for the stock are at $7.25 & $7.98 respectively.


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