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Coty (COTY) Down on Wider-Than-Expected Q4 Loss & Drab Sales

Coty Inc. COTY came out with dismal fourth-quarter fiscal 2020 results, wherein both top and bottom lines slumped year over year and fell significantly short of the respective Zacks Consensus Estimate. In fact, the company reported adjusted loss in the quarter. Results were battered by the impacts of the COVID-19 pandemic. Shares of the cosmetics biggie lost around 6% during the pre-market trading session on Aug 27.

Nonetheless, management noted that it has been witnessing considerable business improvements over the last two months and expects such trends to continue. Coty anticipates returning to profit in the first quarter of fiscal 2021, in terms of adjusted operating income from continuing operations. The company remains on track to balance and strengthen its portfolio by staying tuned to the evolving consumer demand. Toward this end, it is making efforts to expand its exposure toward skincare, Northern Asia and e-commerce, alongside keeping scope for more brand-building investments.

Coty is also taking robust steps to enhance financial leverage and on track to generate about one-third savings from its fixed cost-reduction program of $600 million by the end of fiscal 2021.

Quarter in Detail

Results from continuing operations reflect the total company results, excluding revenues and costs that are directly associated with the Wella business, which will be offloaded soon. Ongoing Coty results reflect the performance from continuing operations, together with some cost recovery anticipated under the Wella transitional service agreement (or Wella TSA).

Adjusted loss from continuing operations came in at 46 cents per share, which was significantly wider than the Zacks Consensus Estimate of a loss of 8 cents. Moreover, the bottom line deteriorated from earnings of 3 cents recorded in the year-ago period.

Coty Inc. Price, Consensus and EPS Surprise

Coty Inc. Price, Consensus and EPS Surprise

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

Coty generated revenues from continuing operations of $560.4 million, which fell considerably short of the Zacks Consensus Estimate of $1,394 million. Moreover, the top line slumped 62.8% year over year. Currency translations negatively impacted revenues to the tune of 2%. Like for Like or LFL revenues tanked 59.7%. LFL revenues were down in all regions, with mass business seeing a 39% decline and the prestige business being down more than 70%. Results were marred by broad-based channel shutdowns in the fourth quarter.

Adjusted gross margin from continuing operations nosedived from 60.8% to 40.6%, thanks to reduced volumes induced by the coronavirus outbreak. Also, higher excess and obsolescence expenses due to the soft demand, along with underutilization costs resulting from manufacturing plant closures, were deterrents.

Adjusted operating loss from continuing operations came in at $335.3 million against adjusted operating income of $126.2 million reported in the year-ago quarter. Adjusted operating loss for Ongoing Coty came in at $322 million against income of $139 million in the year-ago period.

Channel-Wise Details (From Continuing Operations)

Luxury: Net revenues in the segment fell 71% to $219.4 million, while LFL revenues declined 73%. Segment sales saw considerable pressure from several channel closures, such as departmental stores, specialty retailers, travel retail and perfumeries, for a significant part of the quarter. Though retailers have reopened stores, sales are still under pressure. Nevertheless, e-commerce accounted for about 30% of Luxury segment revenues in the quarter, given consumers’ growing shift toward this mode of shopping amid the pandemic. Further, segment revenues were aided by Kylie Beauty sales inclusion.

Consumer Beauty: Consumer Beauty revenues declined 55% year over year to $340.7 million while LFL sales fell 48%. Revenues were hurt by absence of Younique’s revenues, which were included in the prior-year quarter. Also, reduced traffic in drugstores and mass retailers globally hampered results. Also, consumers’ shifting preference for more important personal care products put pressure on the color cosmetic category. On the brighter side, e-commerce sell-out saw solid growth across brick & click as well as e-retailers, especially at Amazon AMZN. Markedly, e-commerce formed for about 10% of Consumer Beauty segment revenues in the quarter.

Corporate: Net revenues in the segment amounted to $0.3 million compared with $0.2 million in the year-ago period.

Segment Results

Net revenues in Americas plunged 52.2% (down 51.5% on an LFL basis) year on year to $264.8 million. Sales in EMEA dropped 68.2% (down 67.2% at LFL) year over year to $211 million. Sales in the Asia Pacific region declined 59% (down 57.5% at LFL) year on year to $84.6 million.

Other Financial Updates

Coty ended fiscal 2020 with cash and cash equivalents of $308.3 million. Notably, during the fourth quarter, the company repaid $1,300 million of its revolving credit facility worth $2,750 million. In fiscal 2020, Coty used net cash in operating activities of $50.9 million. Free cash outflow during the same time frame was $318.3 million. Markedly, Coty’s net debt of $7,848 million as of Jun 30, 2020, declined $299.4 million on a sequential basis.

Key Things to Note

On Jun 1, Coty entered into a definitive deal with KKR for the Professional and Retail Hair business of the former, which includes Wella, OPI, Clairol and ghd brands (collectively known as Wella). Per the deal, KKR will have a 60% stake in the separately managed business, whereas Coty will hold the remaining 40%. During the fourth quarter, revenues from the Wella business plummeted 40.6% to $361.6 million (both reported and LFL) due to major salon closures throughout the quarter.

On Jun 29, Coty announced a partnership with one of the most influential celebrities — Kim Kardashian West. Per the deal, the company will buy a 20% ownership stake in Kim Kardashian’s beauty business for $200 million. This acquisition is expected to conclude in the third quarter. In July, management named Sue Nabi as the company’s new CEO from Sep 1.

Shares of the Zacks Rank #3 (Hold) company have lost 8.1% in the past three months against the industry’s growth of 11.9%.

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