uploads///Q Margins overview

How Coty’s Brazilian Acquisition Impacted Its Operating Margin

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Nov. 20 2020, Updated 12:12 p.m. ET

Coty’s fiscal 3Q16 gross margin falls

Coty (COTY) reported a fall in its gross margin in fiscal 3Q16. Its reported gross margin came in at 61.2% in fiscal 3Q16 compared to 62.3% in fiscal 3Q15. Its adjusted gross margin rose to 61.8%, driven primarily by a lower level of promotional and discounted pricing activity.

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Adjusted operating margin compared to peers’

Coty’s adjusted operating income fell 19% to $0.08 billion compared to $0.1 billion in the prior year’s quarter. This reflected the one-time, non-recurring negative impact of its Brazilian Beauty Business acquisition. As a percentage of its net revenue, Coty’s adjusted operating margin fell by 230 basis points to 8.6% from 10.9%.

Similarly, Estée Lauder’s (EL) operating margin fell to 14.5% in fiscal 3Q16 compared to 15.4% in fiscal 3Q15 due to lower operating results. However, Procter & Gamble’s (PG) fiscal 3Q16 operating margin rose to 21.1%. The rise was due to its productivity savings.

Avon’s (AVP) 1Q16 adjusted operating margin fell by 230 basis points to 4.2%. L’Oréal (LRLCY) and Shiseido (SSDOY) report their margins every six months.

Cash flows and savings

Year-to-date in fiscal 2016, Coty has generated $0.4 billion in operating cash flow and $0.3 billion in free cash flow, with free cash flow rising $0.1 billion compared to fiscal 2015. Last quarter, Coty recognized cumulative savings of ~$170 million, driven by the following:

  1. fixed-cost reduction in direct procurement savings
  2. footprint consolidation
  3. streamlined operations in China

Margin-accretive move

On April 22, 2016, the company filed a Registration Statement on Form S-4 related to its transaction with P&G Beauty Brands.

Coty’s recent acquisition of Bourjois’s business has also been integrated within Coty’s local subsidiaries. Bourjois’s and Coty’s processes and information technology are now fully aligned. This will not only be a good growth opportunity for the brand, it will also be margin accretive to Coty’s Color Cosmetics business in fiscal 2017.

Coty makes up 0.04% of the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio ETF (PRFZ).[1. Updated on June 14, 2016]

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