Coty Inc. Reports First Quarter Fiscal 2014 Results

NEW YORK, Nov. 7, 2013 /PRNewswire/ -- Coty Inc. (NYSE: COTY) today announced financial results for the first quarter of fiscal 2014, ended September 30, 2013.  

First Quarter Fiscal 2014 Summary

• Net revenues of $1,178.2 million decreased 2.6% like-for-like and 2.9% as reported relative to the prior-year period
• Adjusted operating income of $186.1 million decreased from $203.0 million in the prior-year period
• Adjusted net income of $108.3 million decreased from $117.8 million in the prior-year period
• Adjusted earnings per diluted share decreased to $0.28 from $0.30 in the prior-year period 
• Net cash provided by operating activities, excluding cash used for private company stock option exercises, increased by $123.0 million to $101.2 million from a use of ($21.8) million in the prior-year period

Commenting on the Company's performance, Michele Scannavini, CEO of Coty Inc., said,
"In the first quarter we faced a significant market slowdown in the fragrance and nail categories, particularly in the U.S. This triggered heavy trade destocking and a slower order pace that meaningfully affected our U.S. mass market and overall business. On the other hand, we are very pleased with our growth in the prestige channel and in the emerging markets, areas we had targeted for accelerated development.

While our business is facing challenges in the first half of the fiscal year, we are targeting the return to sustained top-line growth in the second half, fueled by strong initiative plans on our power brands, particularly in the Color Cosmetics segment, and further acceleration of our business in the emerging markets. During this time, we will continue with our successful efforts to further optimize our cost structure and increase the cash generation from our business."

Basis of Presentation and Exceptional Items

The term "like-for-like" describes the performance of the business on a comparable basis, excluding material acquisitions, all divestitures, discontinued operations and foreign currency exchange translations to the extent applicable.  "Like-for-like" does not exclude net revenues from joint venture consolidations and conversion from third-party to direct distribution.   The term "adjusted" excludes the impact of non-recurring items, private company share-based compensation expense and restructuring costs to the extent applicable. Refer to "Non-GAAP Financial Measures" for a definition of free cash flow.

Net revenues are reported by segment and geographic region and are discussed below on a like-for-like basis.  Operating income is reported by segment.  All changes in margin percentage are described in basis points rounded to the nearest tenth of a percent.

Net revenues, adjusted selling, general and administrative expense (SG&A) and adjusted operating income are presented on an actual and a constant currency basis.  SG&A, operating income, effective tax rate, net income and earnings per share (EPS) are presented on a reported (GAAP) basis and an adjusted (non-GAAP) basis.  Adjusted SG&A, adjusted operating income, adjusted effective tax rate, adjusted net income and adjusted EPS on an actual and constant currency basis, net revenues on a constant currency basis and like-for-like are non-GAAP financial measures.  A reconciliation between GAAP and non-GAAP results can be found in the tables and footnotes at the end of this release.

First Quarter Fiscal 2014 Summary Operating Review

Net revenues of $1,178.2 million decreased 2.6% like-for-like and 2.9% as reported from the prior-year period. The like-for-like decline was driven by the Americas, which saw a 10% decline primarily caused by consumption slowdown in the mass nail and fragrance markets, and consequently reduced low orders and trade destocking particularly in the U.S. mass channel. Excluding the Americas, net revenues in the rest of the world grew, with EMEA up 2% and Asia Pacific up 7%. Emerging markets had strong 8% growth. By segment, the decline was concentrated in Color Cosmetics, particularly in Sally Hansen, which was impacted by the sudden and sharp trend inversion in the U.S. nail market as well as increased competitiveness in the category. Fragrances grew 1%, led by power brands Calvin Klein, Chloe and Davidoff. Skin & Body Care had a marginal decline, with philosophy recording solid growth for the second consecutive quarter.  

Gross margin decreased to 59.9% compared to 60.7% in the prior-year period. This decline primarily reflected higher customer discounts and allowances to maintain competitive positions in the highly promotional European market, as well as negative foreign currency impact.  The decline more than offset the solid reduction in cost of goods sold, generated by our supply chain savings program and the positive effect of mix as sales of our products sold through the prestige channel increased as a proportion of our total net revenues.  

Adjusted SG&A expense as a percentage of net revenues remained flat at 42.2%.

Operating income remained stable at $165.6 million versus $165.9 million in the prior-year period. Lower SG&A expense was offset by higher cost of sales.

Adjusted operating income declined 8% to $186.1 million at actual rates, from $203.0 million in the prior-year period. As a percentage of net revenues, adjusted operating margin decreased 90 basis points to 15.8% from 16.7%, primarily driven by a lower gross margin and higher amortization expense.

Adjusted effective tax rate was 30.7% compared to 32.4% in the prior-year period.  The decrease reflected a higher effective rate in the prior year due to the expected expiration in 2012 of certain U.S. tax credits on foreign source income which were reinstated in 2013. The adjusted cash tax rate for the quarter was 10.5%. 

Net income increased to $93.5 million from $86.7 million in the prior-year period. This increase primarily reflected stable operating income and lower tax expense relative to the prior-year period.

Adjusted net income decreased to $108.3 million from $117.8 million in the prior-year period, primarily reflecting lower adjusted operating income, partially offset by lower income taxes.  As a percentage of net revenues, adjusted net income margin decreased 50 basis points to 9.2% from 9.7%.

Cash Flows

• Net cash provided by operating activities, excluding cash used for private company stock option exercises, increased to $101.2 million from a use of ($21.8) million in the prior-year period.  This $123.0 million increase was driven by a significant improvement in working capital, driven by trade receivables, inventory and accounts payable.
• Net debt decreased by $29.9 million to $1,679.9 million from $1,709.8 million at June 30, 2013.
• Free cash flow increased by $117.4 million to $35.6 million in the quarter compared to ($81.8) million in the prior year.

Fragrances

• Increased net revenues on a like-for-like basis reflected growth in our power brands Calvin Klein, Chloe, and Davidoff.
• Segment growth was also driven by the strengthening of the Roberto Cavalli brand through new launches Just Cavalli for him and Just Cavalli for her, and the new launch of Katy Perry's Killer Queen.
• Overall growth was mitigated by the decline in certain celebrity fragrances and by expired licenses, including Kenneth Cole.
• Adjusted operating income for Fragrances increased 14% to $152.8 million from $134.3 million in the prior-year period, resulting in 21.7% adjusted operating income margin, an improvement of 260 basis points versus the prior year.

Color Cosmetics

• Net revenues declined in the Color Cosmetics segment in part due to significant destocking across key mass retailers in the U.S. following a demand slowdown especially in the Nail category. This, together with increased competitiveness in the category, has particularly impacted Sally Hansen's performance.
• Rimmel continued to grow during the quarter, supported by a strong innovation pipeline. Over the last 12 months, Rimmel has been the fastest growing color cosmetics brand within the top 10 in the U.S. mass market.
• Adjusted operating income for Color Cosmetics decreased to $36.8 million from $73.2 million in the prior-year period, resulting in 11.8% adjusted operating income margin, a decline of 930 basis points compared to the prior-year period.

Skin & Body Care

• Skin & Body Care net revenues declined by $2.5 million, or 2% on a like-for-like basis, due to declines in the TJoy brand, mostly due to distribution network reorganization.
• philosophy recorded solid growth for the second quarter in a row. The brand experienced growth across key retailer customers and our direct-to-consumer business in the U.S., thanks to the impact of the new innovation plan. Positive progress in international expansion also fueled the brand strength. adidas was in line with the prior year period, as strong momentum in emerging markets was offset by softness in the European and U.S. markets.  
• Adjusted operating loss for Skin & Body Care was $(3.5) million compared to $(4.5) million in the prior-year period, resulting in a 60 basis point improvement in the adjusted operating margin.

Americas

• The net revenues decrease in the region reflected a significant decline in the U.S., driven by weakness in the mass color cosmetics and fragrance markets, with particular pressure in the nail category.
• Emerging markets in the region, particularly Brazil, Chile, and Travel Retail experienced double-digit growth.

Europe, Middle East & Africa

• Growth was driven both by developed markets, including the U.K. and Travel Retail, and by emerging markets in the region, primarily the Middle East and Travel Retail.
• Key brands contributing to the growth in the region included Chloe, Davidoff, Roberto Cavalli, Katy Perry, and OPI.
• Growth in the region was achieved despite recessive market conditions in Southern Europe and a slow-down of the U.K. and Eastern European markets. These market dynamics increased promotional pressure and trade discounting.

Asia Pacific

• The Company recorded double-digit growth in Australia in part due to growth in power brands Calvin Klein, Rimmel, and adidas.
• The region also saw growth in Singapore, Travel Retail, and Hong Kong.

Outlook for Fiscal 2014 Second Quarter and Full Year

The Company expects to see the challenges coming from the market slowdown and trade destocking in the U.S. and from the highly promotional environment in Europe to continue in the next quarter. In the second half, Coty targets returning to top-line growth in line with or better than the markets where the Company competes, fueled by further acceleration of its growth in emerging markets, competitive innovation, and investment plans supporting its power brands.

Other noteworthy Company developments since the closing of the quarter include:

• Coty and Prada Group announced an exclusive license agreement to create, develop and distribute a signature line of fragrances under the Miu Miu name. The Miu Miu fragrance line is expected to debut in 2015.
• Coty entered into a framework agreement with our existing commercial partner in South Africa, Indigo Brands, a member of the South Africa-based AVI Brands Group.  The new arrangement shifts control of our business to Coty's wholly owned subsidiary in South Africa, and gives Coty greater opportunity to grow and expand its brands' presence throughout Sub-Saharan Africa.

Conference Call

Coty Inc. will host a conference call at 9:30 a.m. (ET) today, November 7, 2013 to discuss its results. The dial-in number for the call is 866-318-8613 in the U.S. or 617-399-5132 internationally (conference passcode number: 96003062). The call will also be webcast live at http://investors.coty.com.  The conference call will be available for replay. The replay dial-in number is 888-286-8010 in the U.S. or 617-801-6888 internationally (conference passcode number: 50568575).

About Coty Inc.

Coty is a leading global beauty company with net revenues of $4.6 billion for the fiscal year ended June 30, 2013.  Founded in Paris in 1904, Coty is a pure play beauty company with a portfolio of well-known fragrances, color cosmetics and skin & body care products sold in over 130 countries and territories.  Coty's product offerings include such power brands as adidas, Calvin Klein, Chloe, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen.

For additional information about Coty Inc., please visit www.coty.com.

Forward Looking Statements

Certain statements in this release are forward-looking statements.  These forward-looking statements reflect our current views with respect to, among other things, our future operations and financial performance; expected growth; our ability to support our planned business operation on a near- and long-term basis and our outlook for fiscal 2014's second quarter and full year.  These forward-looking statements are generally identified by words or phrases, such as "anticipate", "estimate", "plan", "project", "expect", "believe", "intend", "foresee", "forecast", "will", "may", "should," "outlook," "continue," "intend," "aim" and similar words or phrases. 

Reported results should not be considered an indication of future performance, and actual results may differ materially from the results predicted due to risks and uncertainties including:

• our ability to achieve our global business strategy and compete effectively in the beauty industry;
• our ability to anticipate, gauge and respond to market trends and consumer preferences, which may change rapidly;
• our ability to identify suitable acquisition targets and managerial, integration, operational and financial risks associated with those acquisitions;
• risks related to our international operations, including foreign political, regulatory, economic and reputational risks;
• dependence on certain licenses, entities performing outsourced functions and third-party suppliers;
• our and our brand partners' and licensors' ability to obtain, maintain and protect the intellectual property rights used in our products and our abilities to protect our respective reputations;
• impairments to our goodwill and other assets;
• global political and/or economic uncertainties or disruptions, including a general economic downturn, the debt crisis and economic environment in Europe, a sudden disruption in business conditions affecting consumer purchases of our products, volatility in the financial markets and fluctuations in currency exchange rates;
• our ability to manage seasonal variability;
• consolidation among retailers, shifts in consumers' preferred distribution channels, and other changes in the retail environment in which we sell our products;
• disruptions in operations;
• increasing dependency on information technology and our ability to protect against service interruptions, data corruption, cyber-based attacks or network security breaches;
• changes in laws, regulations and policies that affect our business or products;
• market acceptance of  new product introductions; and
• the illegal distribution and sale by third parties of counterfeit versions of our products;

More information about potential risks and uncertainties that could affect our business and financial results is included under "Risk Factors" and "Management Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K and other periodic reports the Company may file with the Securities and Exchange Commission from time to time.

The Company assumes no responsibility to update forward-looking statements made herein or otherwise.

Non-GAAP Financial Measures

The company operates on a global basis, with the majority of net revenues generated outside of the U.S. Accordingly, fluctuations in foreign currency exchange rates can affect results of operations. Therefore, to supplement financial results presented in accordance with GAAP, certain financial information is presented excluding the impact of foreign currency exchange translations to provide a framework for assessing how the underlying businesses performed excluding the impact of foreign currency exchange translations ("constant currency"). Constant currency information compares results between periods as if exchange rates had remained constant period-over-period, with the current period's results calculated at the prior-year period's rates. The Company calculates constant currency information by translating current and prior-period results for entities reporting in currencies other than U.S. dollars into U.S. dollars using constant foreign currency exchange rates.  The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate.  The constant currency information presented may not be comparable to similarly titled measures reported by other companies. The Company discloses the following constant currency financial measures: net revenues, adjusted SG&A expense and adjusted operating income.

The Company presents growth on a like-for-like basis. The Company believes that like-for-like growth better enables management and investors to analyze and compare our organic growth from period to period.  In the periods described in this release, like-for-like growth excludes the impact of foreign currency exchange translations, the divestiture of one of our licenses and the expiration of a certain North American service agreement that was not renewed and does not exclude revenues from the acquisition of a third-party distributor.   For reconciliation of our net revenues like-for-like growth, see the table entitled "Reconciliation of Reported Net revenues to Like-For-Like Net Revenues."  For a reconciliation of our like-for-like growth by segment and geographic region, see the tables entitled "Net Revenues and Adjusted Operating Income by Segment" and "Net Revenues by Geographic Regions."  

The Company presents SG&A expense, operating income, effective tax rate, net income and EPS on a non-GAAP basis and specifies that these measures are non-GAAP by using the term "adjusted".  The Company believes these non-GAAP financial measures better enable management and investors to analyze and compare the underlying business results from period to period.  In calculating adjusted SG&A expense, operating income, effective tax rate, net income and EPS, the Company excludes the impact of nonrecurring items, private company share-based compensation expense and restructuring costs, to the extent applicable. The Company has provided a quantitative reconciliation of the difference between the non-GAAP financial measures and the financial measures calculated and reported in accordance with GAAP.  For a reconciliation of adjusted SG&A expense to SG&A expense, and adjusted EPS to EPS, see the table entitled "Reconciliation of Reported to Adjusted Results for the Consolidated Statements of Operation."  For a reconciliation of adjusted operating income to operating income, see the table entitled "Reconciliation of Reported Operating Income to Adjusted Operating Income."  For a reconciliation of adjusted effective tax rate to effective tax rate, see the table entitled "Reconciliation of Reported Income Before Income Taxes and Effective Tax Rates to Adjusted Income Before Income Taxes and Effective Taxes."  For a reconciliation of adjusted net income to net income, see the table entitled "Reconciliation of Reported Net Income to Adjusted Net Income."

The Company also presents free cash flow.  Free cash flow is defined as net cash provided by operating activities, less capital expenditures and the contingent purchase price consideration payments of up to $30.0 per year related to the Unilever Cosmetics International acquisition.  Free cash flow excludes cash used for private company stock option exercises and cash used for acquisitions.  Management believes that free cash flow is useful for investors because it provides them with an important perspective on the cash available for debt repayment and other strategic measures, after making necessary capital investments in property and equipment to support the Company's ongoing business operations, and provides them with the same measures that management uses as the basis for making resource allocation decisions. For a reconciliation of Free Cash Flow, see the table entitled "reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow".

These non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. 

- Tables Follow –

For more information:

Investor Relations
Kevin Monaco, 212-389-6815, Senior Vice President, Treasurer and Investor Relations

Media
Catherine Walsh, 212-389-7346, Senior Vice President, Corporate Communications

 

SOURCE Coty Inc.