Coty Inc. (COTY, Financial) is one of the growth stocks in the beauty industry that has been playing well. The company has posted mixed quarterly results, including a 5.50% increase in net revenues. For fiscal 2016, net revenues decreased 1.05%.
Coty began its journey in 1904, and is a leading global beauty company with a portfolio of strong, well-recognized brands. The company’s top 10 power brands include Calvin Klein, Davidoff, Rimmel, Sally Hansen, Philosophy, Playboy, and more. These brands represent 70% of the revenues of Fiscal 2016. Coty has sales in over 130 countries and territories with a fast-growing emerging markets business and strong historical presence in developed markets. Further, Coty has 6 state-of-the-art R&D labs and 8 manufacturing plants with effective multi-channel distribution.
Coty’s operating segments and geographic regions are:
| Operating segments | Geographic regions |
| Fragrances | Americas |
| Color Cosmetics | Europe, the Middle East & Africa (EMEA) |
| Skin & Body Care | Asia Pacific |
Mixed fourth quarter results
On Aug. 16, Coty reported its financial results for the fourth quarter and fiscal year ended June 30. Net revenues increased 5.50% to $1075.6 million, compared to $1019.5 million for the comparable prior-year period. Gross profit increased 0.76% to $610 million, compared to $605.4 million for the year-ago quarter. Further, the company’s gross profit margin for the reported quarter was 56.7%, compared to 59.4% for the same period last year.
Operating loss for the reported quarter was $(2.9) million, a sharp improvement of $20.5 million, compared to $(23.4) million for the prior-year period. Further, adjusted operating income increased 18.94% to $94.2 million, compared to $79.2 million for the same period last year.
Coty reported a net loss of $(31.0) million, compared to a net income of $21.0 million for the comparable prior-year period. On the other hand, adjusted net income increased 6.03% to $45.7 million, compared to $43.1 million.
Diluted EPS for the reported quarter was $(0.09), compared to $0.05 for the same period last year. Further, adjusted diluted EPS increased 8.33% to $0.13, compared to $0.12 for the prior-year period.
Coty ended the quarter by providing net cash of $56.1 million from operating activities, compared to $138.1 million in the prior-year period.
A glimpse into full year performance
| Metrics | Fiscal 2016 | Fiscal 2015 | % change |
| Net revenues | $4349.1 million | $4395.2 million | (1.05)% |
| Gross profit | $2603.1 million | $2638.2 million | (1.33)% |
| Gross profit margin | 59.9% | 60.0% | --- |
| Operating income | $254.2 million | $395.1 million | (35.66)% |
| Adjusted operating income | $622.9 million | $603.6 million | 3.2% |
| Net income | $156.9 million | $232.5 million | (32.52)% |
| Adjusted net income | $485.2 million | $408.5 million | 18.78% |
| Diluted EPS | $0.44 | $0.64 | (31.25)% |
| Adjusted diluted EPS | $1.37 | $1.13 | 21.24% |
| Cash and cash equivalents | $372.4 million | $341.3 million | 9.11% |
| Long-term debt | $4001.0 million | $2605.9 million | (53.54)% |
| Cash flow from operating activities | $501.4 million | $526.3 million | (4.73)% |
Coty’s long-term debt almost doubled, primarily due to the Brazil acquisition (closed in February) and is showing strong revenue and profit momentum in its first full quarter results.
Share repurchase
Coty repurchased in the open market 27.4 million shares of Class A Common Stock for $767 million during fiscal 2016.
Operating segments’ and geographic regions’ performance
1. Fragrances
| Metrics | Quarterly performance | Full year performance | ||||
| Q4 2016 | Q4 2015 | % change | Fiscal 2016 | Fiscal 2015 | % change | |
| Net revenues | $422.2 million | $414.4 million | 1.88% | $2012.7 million | $2178.3 million | (7.60)% |
| Operating income | $19.9 million | --- | (28)% | $288.9 million | --- | (18)% |
| Adjusted operating income | $30.9 million | --- | (20)% | $332.2 million | --- | (16)% |
2. Color Cosmetics
| Metrics | Quarterly performance | Full year performance | ||||
| Q4 2016 | Q4 2015 | % change | Fiscal 2016 | Fiscal 2015 | % change | |
| Net revenues | $407.5 million | $423.8 million | (3.85)% | $1547.5 million | $1445.0 million | 7.09% |
| Operating income | $49.8 million | --- | 36% | $213.7 million | --- | 35% |
| Adjusted operating income | $54.2 million | --- | 22% | $231.2 million | --- | 32% |
3.Skin & Body Care
| Metrics | Quarterly performance | Full year performance | ||||
| Q4 2016 | Q4 2015 | % change | Fiscal 2016 | Fiscal 2015 | % change | |
| Net revenues | $164.7 million | $181.3 million | (9.16)% | $693.4 million | $771.9 million | (10.17)% |
| Operating income | $(4.1) million | --- | 45% | $39.3 million | --- | 19% |
| Adjusted operating income | $(0.3) million | --- | 92% | $54.9 million | --- | 74% |
- Net revenues for the reported quarter in the Americas increased 12.22% to $454.5 million, compared to $405 million for the comparable prior-year period. For fiscal 2016, net revenues decreased 1.93% to $1663.3 million.
- Net revenues for the reported quarter in the EMEA segment remained almost flat to $499.4 million, compared to $497.1 million for the comparable prior-year period. Also, for fiscal 2016, net revenues remained almost flat to $2169 million.
- Net revenues for the reported quarter in the Asia Pacific segment increased 3.66% to $121.7 million, compared to $117.4 million for the comparable prior-year period. For fiscal 2016, net revenues decreased 3.07% to $516.8 million.
Projections
For fiscal 2017, Coty is aiming to improve its net revenue momentum and return excluding foreign currency, with solid improvement in the adjusted operating margin and strong operating cash flow conversion.
P&G merger
To become a global leader in the beauty industry, Coty, on May 3, announced an update on its transaction with The Procter & Gamble Company (PG, Financial). In 2015, Coty has announced that it is going to acquire P&G’s Fragrance, Color Cosmetics and Hair Color Business through a Reverse Morris Trust structure. This acquisition will provide pro forma combined annual revenues of more than $9 billion based on fiscal 2015 performance. P&G shareholders whose shares are tendered and accepted will own approximately 54% of the combined company on a fully diluted basis.
With this acquisition, New Coty has formed with a combination of existing Coty, annualized Hypermarcas Beauty Business revenues, and acquired P&G beauty brands.
Projections after merger
- P&G beauty brands is expected to add approximately 500-600 bps to the Coty stand-alone operating profit margins over a 4-year period.
- P&G beauty brands is expected to drive approximately $0.48 adjusted EPS growth through year 4.
- With this acquisition, there will be a working capital benefit of $500 million over four years, and approximately 70% will be realized through FY 2018.
- The combined business will have a moderate pro forma leverage of approximately 3.5x net debt/adjusted EBITDA.
Initiatives
To become a global industry leader, Coty has initiated a radical change in the level of digital engagement with consumers. New digital experts are inserted in brand teams for developing digital marketing content and innovation paired with corporate digital media strategy, planning and buying experts. Further, Coty has implemented the Perfect Store for its categories and brands. The Perfect Store concept will maximize the category by creating shared standards with the retailer for the perfect store to maximize the consumer experience.
Management
Recently, Coty’s board of directors has appointed Camillo Pane as Chief Executive Officer and a member of the Coty Board. Camellio’s extensive experience will help Coty to improve its business performance and to make Coty the new global challenger.
(Source: Company website)
On a concluding note
Overall, Coty is a rock-solid company with a strong balance sheet and strong management team with relevant experience. Coty’s merger with P&G will create a new challenge in the beauty industry with approximately $9.0 billion in net revenues. Further, the merger will enhance Coty’s strong margins and cash flow generation. Finally, with the recent quarterly release, the company is aiming for a better future and is set to deliver greater shareholder returns.
Disclosure: I have no positions in any stocks mentioned in this article.
