uploads/2016/01/F2Q16-Margins-preview1.jpg

Coty Could See Greater Revenue and Hence Higher Margins

By

Updated

Coty’s fiscal 1Q16 margins

Coty (COTY) reported a slight improvement in the adjusted gross margin in fiscal 1Q16. The adjusted gross margin rose 70 basis points to 60.3% in fiscal 1Q16. The rise was due to the continuous effort in driving supply chain efficiencies.

Coty’s adjusted operating income rose 6.6% to $0.18 billion in fiscal 1Q16 compared to $0.16 in fiscal 1Q15. However, on a constant currency basis, the operating income rose 12% in fiscal 1Q16. On the other hand, the reported operating margin fell to 7.4%. However, the adjusted operating margin grew 150 basis points with an improvement in each of the segments. This included a rise of 110 basis points in fragrances, 280 basis points in color cosmetics, and 120 basis points in skin and body care.

Article continues below advertisement

Peers and adjusted operating margins

Similarly, Estée Lauder’s (EL) adjusted constant currency operating income rose 8%. Operating margin rose to ~16% in fiscal 1Q16 compared to 13.2% in fiscal 1Q15. However, Avon’s (AVP) adjusted operating income fell 72.5% to $0.05 billion in 3Q15. This resulted in a fall in operating margin to 1.4% in 3Q15. The fall was driven by non-comparable items that, in aggregate, negatively impacted the year-over-year operating margin comparison by 460 basis points.

Strengthening geographically

With changing consumer behavior and rising disposable incomes, there has been a rise in demand for beauty and personal care products. Like peers L’Oréal (LRLCY) and Shiseido (SSDOY), COTY aims to strengthen its business by changing the mix of profits by geography and by reducing the impact of the natural foreign exchange hedge compared to prior periods. Coty expects this impact to continue in fiscal 2Q16 and then moderate in the second half of the year.

More brand penetration with lower operational costs will likely result in greater revenue and hence higher margins.

As of January 22, 2016, Coty has exposure in the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio ETF (PRFZ) with 0.1% of the total weight of the portfolio.

Advertisement

More From Market Realist