Coty Swings to Q4 Loss on Acquisition-related Costs

Acquires digital marketing platform Beamly to enhance digital engagement with consumers

c1Beauty company Coty Inc. (NYSE: COTY) announced its Q4 FY16 and full year FY16 financial results on August 16th, 2016.

The New York-based Company, together with its subsidiaries, manufactures, markets, and distributes beauty products worldwide. The company operates through four segments: Fragrances, Color Cosmetics, Skin & Body Care, and Brazil Beauty Business. Coty offers fragrances under brand names including Calvin Klein, Marc Jacobs, Davidoff, Chloé, Balenciaga, and Beyoncé. The Company also provides lip, eye, nail, and facial color products under the Bourjois, Rimmel, Sally Hansen, and OPI brands. In addition, Coty offers shower gels, deodorants, skin care, and sun treatment products under the adidas, Lancaster, philosophy, and Playboy brand names. Coty sells its brands in over 130 countries and territories. Read more about Coty’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Coty reported a 6% growth in net revenues to $1,075.6 million and a 1% decline in the underlying business. Fragrances net revenue grew 2% as reported and 3% like-for-like, with growth increases in each of the fragrance power brands. Color Cosmetics fell 4% as reported and 2% like-for-like, as growth in Rimmel and Bourjois was offset by declines in OPI. Skin & Body Care declined 9% as reported and 7% like-for-like, due to declines in Playboy and philosophy, partially offset by growth in adidas. By geography, net revenue in the Americas grew 12% as reported though declined 6% like-for-like, net revenues in EMEA were flat as reported though grew 2% like-for-like, and net revenues in Asia Pacific grew 4% as reported and 6% like-for-like.

During Q4 FY16, Coty narrowed its operating loss to $2.9 million from $23.4 million in the prior-year period, due to a 200 basis point improvement in operating margin to (0.3%) from (2.3%) in the year-ago period. This improvement was driven by lower expenses, partially offset by higher acquisition-related costs. Adjusted operating income grew 19% to $94.2 million, reflecting higher gross profit. Adjusted operating margin as a percentage of adjusted net revenues expanded 100 basis points to 8.8% compared to 7.8% in the prior-year period.

Despite a revenue growth, Coty swung to a Q4 FY16 loss of $31 million versus a net income of $21.0 million in the year-ago period. However, adjusted net income grew 6% to $45.7 million from $43.1 million in the prior-year period, driven by higher adjusted operating income. On a reported basis, Coty reported Q4 FY16 loss per share of $(0.09) compared to EPS of $0.05 in the prior-year period. Adjusted diluted EPS grew to $0.13 from $0.12 the prior-year period.

Coty’s net cash provided by operating activities was $56.1 million in Q4 FY16 compared to $138.1 million in the prior-year period, partially reflecting higher acquisition-related costs.

Full year FY16 financial highlights

For the full year FY16, Coty’s net revenues fell 1% to $4,349.1 million as reported and like-for-like from the prior-year, due to the negative foreign exchange impact and a modest decline in its core business, partially offset by the positive contributions from the Brazil acquisition and Bourjois. On a like-for-like basis, the 1% decline in the core business was due to a 3% like-for-like decline in both Fragrances and Skin & Body Care, partly offset by a 2% like-for-like growth in Color Cosmetics.

During FY16, Coty’s gross margin of 59.9% remained flat versus the prior year, as lower levels of discounting activity and efforts to drive supply chain efficiencies was offset by acquisition-related inventory revaluation costs. Adjusted gross margin of 60.4% increased from 60.1% in the prior-year.

c2Coty’s FY16 operating income declined 36% to $254.2 million from $395.1 million in the prior year, mainly due to acquisition-related costs. As a percentage of net revenues, operating margin fell to 5.8% from 9.0% in the prior year. Adjusted operating income rose 3% to $622.9 million from $603.6 million; as a percentage of adjusted net revenues, adjusted operating margin expanded 60 basis points to 14.3% from 13.7%.

Lower operating income weighed on net income, which fell 33% to $156.9 million from $232.5 million in the prior year. On the other hand, adjusted net income grew 19% to $485.2 million from $408.5 million in the prior-year, reflecting higher tax benefits. Free cash flow in FY16 grew to $351.3 million from $325.4 million in the prior-year.

Net cash provided by operating activities for FY16 was lower at $501.4 million compared to $526.3 million in the prior-year due to acquisition-related costs.

Other highlights

Source: Coty, Bloomberg

Acquisitions: Coty is on track to successfully integrate its Bourjois acquisition, which closed in April 2015, with its Color Cosmetics segment. Coty’s acquisition of the digital marketing platform, Beamly, is expected to enhance its capabilities to digitally engage with consumers.

Coty, which acquired the beauty assets from Procter & Gamble Company (NYSE: PG) in July 2015 in a transaction valued at $12.5 billion, is working to integrate more than 40 brands, including Gucci fragrances, CoverGirl cosmetics, and Max Factor makeup. After the merger is completed in October 2016, Coty will emerge as the world’s third-largest color cosmetics company, ranking only behind L’Oreal S.A. S.A. (LRLCY: OTC US) and Estee Lauder Companies Inc. (NYSE: EL) in cosmetic sales. Coty will be able to overtake peers such as Avon Products Inc. (NYSE: AVP) and Shiseido Co. Ltd. (SSDOF: OTC US), making it the world’s largest fragrance company by sales.

Post-integration, the merger is expected to create estimated cost savings of approximately $780 million annually, or 16% of acquired revenues, after the next four years. To realize the cost synergies and close the transaction, Coty is anticipated to incur one-off costs of approximately $1.2 billion over the next four years.c4

Brazil acquisition: The Brazil acquisition, which closed in February 2016, is expected to be completed by September 2016. During Q4 FY16, revenues from this business totaled $81.2 million, driving $95.5 million in net revenues for FY16.

Appointment of new CEO: On July 21st, 2016, Coty announced the appointment of Camillo Pane as Chief Executive Officer and member of the Coty Board, effective October 2016. Bart Becht, currently Interim CEO and Chairman of Coty, will continue to serve as the Chairman of Coty’s Board. Camillo Pane is currently the Executive Vice President of Category Development and is a member of the Coty Executive Committee.

Share repurchase and dividend

c6During FY16, Coty repurchased 27.4 million shares of Class A Common Stock for $767 million. Coty also announced that its Board of Directors had approved a 10% increase in FY16 dividend to $0.275 from $0.25 per share on its Class A Common Stock and Class B Common Stock.

Guidance for full year FY17

Coty remains focused on growing its power brands through innovation, digital engagement with consumers, and improved in-market execution. For the Coty standalone business, the Company is targeting net revenue momentum to improve and return to growth in H2 FY17, excluding foreign currency. Coty is targeting its standalone FY17 adjusted operating margin to improve on a constant currency basis, coupled with strong operating cash flow conversion.

Stock Performance

c7Coty’s stock ended the day at $27.27, slipping 0.66%, at the close on Tuesday, August 30th, 2016, having vacillated between an intraday high of $27.84 and a low of $27.07 during the session. The stock’s trading volume was at 1,028,536 for the day. The Company’s market cap was at $9.20 billion as of Tuesday’s close.

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