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Coty Stock Soars as Q1 Earnings Beat Wall Street

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Coty (COTY) stock surged 13.5% today after the company reported strong earnings results for the first quarter of its fiscal 2020. The quarter ended on September 30. Coty’s adjusted EPS of $0.07 were ahead of analysts’ expectation of $0.06. Strong gross margin expansion drove these better-than-expected earnings. However, its first-quarter adjusted EPS declined 36.4% year-over-year. The decline reflected a tax benefit in fiscal 2019’s first quarter.

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Unlike Coty’s earnings, its revenue of $1.94 billion fell short of analysts’ estimates. Wall Street had expected $1.97 billion. Coty is undertaking some major initiatives as part of its ongoing transformation plan. On October 21, Coty announced that it was considering strategic alternatives (including divestiture) for its Professional Beauty business and Brazilian operations. The Professional Beauty business includes brands like Wella, Clairol, and OPI. This move would help Coty focus on its fragrance, cosmetics, and skincare businesses.

Coty’s Q1 revenue declined 4.4%

Coty’s revenue fell 4.4% year-over-year in the first quarter. A 1.7% rise in the Luxury beauty business and 2.4% growth in the Professional Beauty business were offset by a 13.5% decline in the Consumer Beauty revenue. Notably, the divestiture of the Younique beauty business affected Consumer Beauty revenue. The company completed this divestment on September 16. The Consumer Beauty business, which includes brands like Sally Hansen and Cover Girl, continued to suffer due to weak revenue from color cosmetics.

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Strength in brands like Gucci, Burberry, Chloe, and Hugo Boss perfumes supported growth in the company’s Luxury business. Also, the segment is benefitting from the expansion of the luxury cosmetics category through products like Gucci lipsticks and Burberry cosmetics. Revenue from the Professional Beauty business grew mainly as a result of strength in North America.

Meanwhile, first-quarter sales of rival Estée Lauder (EL) grew 10.5% to $3.90 billion. A 24% surge in skincare category sales drove the company’s overall top line. However, Estée Lauder also faced weakness in the color cosmetics category in North America. Estée Lauder’s makeup category sales grew 2.6% while sales of the fragrance and haircare categories declined 2.1% and 5%, respectively.

Improved margins

Coty’s gross margin expanded by 180 basis points on a reported basis and 160 basis points on an adjusted basis to 62%. This significant improvement reflected a shift toward higher-margin Luxury and Professional Beauty businesses, favorable price and mix in the Professional Beauty business, and effective cost control in the Luxury business.

Also, the higher gross margin and cost control drove a 110-basis-point improvement in the adjusted operating margin to 8%. However, increased investments in working media hurt Coty’s operating margin this time around.

Outlook reaffirmed

Coty also reaffirmed its fiscal 2020 guidance today. The company continues to predict stable to slightly lower net revenue on a comparable basis. Plus, it forecast mid-single-digit growth in its adjusted EPS as well as a moderate improvement in its free cash flow.

In the first-quarter presentation, the company highlighted its turnaround efforts. These initiatives include stepping up its marketing, improving its gross margin, and streamlining its organizational structure. Mainly, the company increased its working media expenditure by 11%—with particular emphasis on its Consumer Beauty brands.

Coty is now tapping channels like Amazon and Ulta Beauty (ULTA). And investors should also note that Coty saw substantial growth in its mass brands listed on Amazon as part of its collaboration under its global vendor management program.

Meanwhile, Ulta Beauty is scheduled to announce its third-quarter earnings results on December 5. Analysts expect the specialty beauty retailer’s Q3 sales to grow 8.4% to $1.69 billion. However, its adjusted EPS are expected to fall 1.8% to $2.14. Stay tuned for our coverage of the results!

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