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Coty’s Reported and Adjusted Operational Margins: What Happened?

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Aug. 19 2016, Updated 9:04 a.m. ET

Reported gross margin decline

Coty (COTY) reported a decline in its gross margin in 4Q16 as well as fiscal 2016. The reported gross margin came in at 56.7% for 4Q16 and 59.9% for fiscal 2016 compared to 60.0% for fiscal 2015. An adjusted gross margin of 60.4% in fiscal 2016 increased from 60.1% in the previous year. This change was due to lower levels of discounting activity and continuous efforts in driving supply chain efficiencies.

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Adjusted operating margin versus peers

Coty’s adjusted operating income increased 3% to $0.6 billion in fiscal 2016 due to reduced non-strategic A&CP spending and lower fixed costs. As a result, adjusted operating margins increased 60 basis points to 14.3% in fiscal 2016 from 13.7% in the prior year.

Reported 4Q16 operating loss improved to -$2.9 million from -$23.4 million in the prior year, reflecting a 200 basis point improvement in the reported operating margin to -0.3% from -2.3%. However, the adjusted operating margin increased 100 basis points to 8.8% in 4Q16.

In comparison, Procter & Gamble’s (PG) 4Q16 operating margin increased to 15.5%. Productivity improvements contributed 360 basis points of operating margin benefit. L’Oréal’s (LRLCY) and Shiseido’s (SSDOY) operating margins also increased. L’Oréal’s operational margin rose 20 basis points to 18.3% for first half of fiscal 2016. Avon’s (AVP) adjusted operating margin improved 100 basis points to 7.3% in C2Q16.

Cash flow and net debt

In fiscal 2016, Coty generated $0.5 billion in operating cash flow and $0.4 billion in free cash flow, up from $0.3 billion in the prior year. This change marked Coty’s seventh consecutive year of generating more than $0.3 billion of free cash flow.

Cash and cash equivalents increased to $0.4 billion and total debt of $4.2 billion rose by $1.5 billion, with net debt of $3.8 billion up $1.5 billion from the balance on June 30, 2015. The increase in net debt was primarily driven by borrowings in connection with acquisition-related spending for the P&G Beauty Brands transaction.

COTY is 0.01% of the iShares Core S&P Total U.S. Stock Market ETF (ITOT).[1. As of August 16, 2016]

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