Coty's profit jump runs ahead of its beauty recovery
A gain on share-linked contracts lifted earnings while operating profit fell. Stronger core brands and cash flow show where the turnaround is making progress.
Coty's adjusted net income rose 38%, helped by a gain on contracts tied to its own shares. Profit from running the beauty business still fell.
What lifted the bottom line
For its fiscal first quarter, ended September 30, Coty reported adjusted net income of $146.1 million, up from $106.0 million. Those figures retain the effect of financial contracts used to hedge potential share buybacks.
The contracts produced a $14.8 million after-tax gain, compared with a $26.5 million loss a year earlier. That favorable swing was larger than the increase in adjusted net income. Lower net interest expense also helped.
Coty said adjusted earnings per share excluding the swap effect were $0.15, unchanged from a year earlier. That still beat its original $0.11 to $0.13 forecast. Adjusted EBITDA, a profit measure before interest, taxes, depreciation, amortization and specified adjustments, fell 7% rather than the low-teens decline expected in August.
Some brands are recovering faster than the business
The six core Prestige brands grew sales 5% on Coty's like-for-like basis, helped by product launches including Marc Jacobs makeup. They account for nearly three-quarters of Prestige sales.
The full Prestige division nevertheless declined 1% on that basis, while Consumer Beauty fell 3%. Group revenue slipped 1% as reported to $1.56 billion. Adjusted operating income fell 8% to $220.5 million.
Gross margin also declined more than Coty originally expected. Higher freight costs and inventory provisions helped push it down 1.2 percentage points, to 63.3%, against an earlier forecast for a decline of 0.5 to 1 point.
Cash gives the recovery something firmer
Free cash flow improved to $84.6 million from $11.2 million. Better payables and receivables movements helped offset weaker operating earnings and higher inventory.
That cash, together with $250 million received under the Gucci Beauty license-exit agreement, helped reduce net debt by more than $300 million since June. The Gucci payment is separate from operating cash flow.
For the holiday quarter, Coty expects another low-single-digit like-for-like sales decline and a high-single-digit decline in adjusted EBITDA. It forecasts adjusted EPS excluding the swap of $0.16 to $0.18 and keeps its first-half free-cash-flow target above $300 million.
Our Coty company profile compares the results with earlier expectations and tracks its debt, share-linked contracts and license changes.