Before Coty (COTY) released fourth-quarter figures on Aug. 16, investors were worried that the stock did not have a "pretty" valuation. After two years of earning beats and earning misses accompanied by inconsistent revenue growth, Coty delivered a 7-cent earnings beat with a surprising revenue beat to the tune of $30 million.
Adjusted EPS grew over 20% for the year, operating income grew 3% to $622.9 million, and 2016 adjusted diluted EPS of $1.37 grew 21%. With net revenues declining 1%, constant currency revenues increased 8% and 5%. Let's dig into the strengths and weaknesses of the most current quarter.
The good
Gross margins increased 30 basis points to 60.4%.
Fourth-quarter adjusted operating income grew 19%.
- The company bought back 28.8 million shares since the beginning of the year, buying over $803 million in stock with almost 4 million shares purchased in the months of May, June and July.
- Free cash flow was up to $351 million compared to $325 million the year before.
- The company has several new initiatives that it has launched including Calvin Klein deep euphoria, Marc Jacobs Divine Decadence, Chloe's L'Eau de Parfum, Sally Hansen's Color Therapy and Rimmel, basically ScandalEyes Reloaded.
- Management accredits its top-line performance to its innovation and new initiatives, giving their brands what they need to drive growth.
- Strategic moves such as the company's Brazil acquisition that took place in February are driving, or enhancing, Coty's sales growth.
- Beamly, the newly acquired digital marketing platform, has helped the company when it comes to connecting to consumers and its customers.
- Management recognizes that it has room for improvement when it comes to getting the most productivity out of its investments, improving in-store execution and becoming better when it comes to engaging customers digitally.
- Coty believes that the P&G Beauty Brands transaction will allow it to be not just more competitive but also have a more focused and more experienced staff.
Heard from management
Starting with the following comment by Chairman Bart Becht, addressing the strong quarterly results:
In terms of financial results, our strategy of investing in and fueling growth of our power brands while driving strong profit and margin expansion is continuing to yield results. For the full year, power brands net revenues grew like for like outperforming the overall business. Our adjusted operating profits grew low single digits, and when excluding currency impact it grew high single digits.
Becht on lineup performance:
Our fiscal 2016 Color Cosmetics adjusted operating margin improved 280 basis points to 14.9%, supported by lower promotion and discounting activity and the improved gross margin. The Skin & Body Care adjusted operating margin expanded 380 basis points to 7.9%, primarily resulting from lower A&CP and improved gross margin. Our Fragrances adjusted operating margin remained strong at 16.5%, so declined 170 basis points, partially driven by higher cost of sales.
Coty has also been able to increase cash flow as well as free cash flow year over year. Executive Vice President and Chief Financial Officer Patrice de Talhouet explained:
2016 was another strong year of cash generation, driven in part by significant progress in working capital improvement, on our way to negative working capital. As a result, the operating cash flow totaled $501 million and the free cash flow totaled $351 million, up from $325 million in the prior year, despite an increase of over $100 million in cash acquisition related costs. This was our seventh consecutive year of generating more than $300 million of free cash flow.
How Coty is growing Shareholder value:
Our efforts to drive shareholder value and return cash to shareholders continue through both our dividend and share repurchase activity. As of now on Aug. 1, we raised our annual dividend by 10% to 27.5 cents per share.
Noting that the main focus of the company is to grow through acquisition, Becht said, "From an M&A point of view, yes, we will complement our organic growth strategy with M&A where appropriate, and there clearly it's – so if you ask me, will we use from time to time our cash flow to increase our exposure to good growth categories, countries, segments, where we see good profit and cash opportunities, the answer is yes."
Looking ahead
Management is focused on fueling growth of the company's power brands. But the company is also out to create synergy when it comes to revenue and costs. With that strategy of creating synergy also comes a focus on strategic spending
Coty also announced the appointment of Camillo Pane as chief executive officer, furthering the company to put itself in a position with a CEO who has a track record of accelerating growth and improving business performance. As Becht said, the focus is on nurturing Coty's core brands while keying in on execution and performance of those brands
Management has taken on a strategy of slow and steady growth to become a "better" business rather than rushing to build a "bigger" business. Currently the company has turned its financial focus on reducing its cost structure and improving efficiency, demonstrated by its $270 million in savings for fiscal 2017.
The edge Coty may have is it knows not only where to focus but also how to focus, which in turn makes it more competitive in the marketplace. By placing a focus on its product portfolio as a whole while still honing in on specific product lines, Coty is in a place where it can continue to steal more and more market share.
Disclosure: No position in the stock mentioned.
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