Coty (COTY) Stock Rallies On Q2 Earnings Beat & Y/Y Growth

Coty Inc. (NYSE:COTY) posted second-quarter fiscal 2018 results, wherein both top and bottom lines improved year over year and surpassed the Zacks Consensus Estimate. Notably, this marked the company’s second and fourth straight quarter of earnings and sales beat, respectively.

Shares of the company rallied 10% during the pre-market trading session. Let’s see if the solid performance can bring a turnaround to Coty’s past stock performance, as shares of this cosmetics company have plunged 10.6% in the past six months, as against the industry’s 16.8% gain.

The company’s adjusted earnings of 32 cents per share jumped 6.7% year over year and came ahead of the Zacks Consensus Estimate of 24 cents. On a GAAP basis, the company reported earnings of 15 cents per share, up significantly from 6 cents recorded in the year-ago period.

Quarter in Detail

The company generated revenues of $2,637.6 million, which advanced 14.8% year over year and topped the Zacks Consensus Estimate of $2,473 million. On a constant currency basis, revenues increased 10.3%, driven by contributions from ghd, Younique and Burberry. Excluding the impacts from ghd, Younique and Burberry, Coty’s organic revenues rose 2.8% on a constant currency basis. This, in turn was backed by robust growth in Luxury and continued strength witnessed in the company’s Professional segment, partly offset by a modest fall in Consumer Beauty organic sales.

Adjusted gross margin contracted 20 basis points to 61.6% in the quarter. Adjusted operating income jumped 12.8% to $347.5 million on the back of higher revenues and stringent cost controls. However, adjusted operating margin contracted 20 basis points to 13.2%.

Segment Details

Luxury: Luxury net revenues surged 13.9% to $951.2 million on a reported basis (up 9.1% on a currency neutral basis). Currency-neutral growth was attributable to an 8.1% rise in underlying sales that was backed by success of new fragrances from Tiffany (NYSE:TIF) and Gucci, improvements in Chloe and 1% contribution from Burberry. Adjusted operating income for Luxury surged 28.6% year over year to $125.4 million.

Consumer Beauty: Consumer Beauty revenues advanced 13.7% to $1,138.6 million on a reported basis. Sales at the segment jumped 9.8% on a currency-neutral basis, courtesy of 11.1% contribution from Younique, somewhat offset by a 1.3% dip in underlying revenues. The latter stemmed from weak performance by various U.S. oriented brands. Adjusted operating income for Consumer Beauty advanced 19.4% to $131.9 million.

Professional: Professional Beauty net revenues of $547.8 million improved 19.1% and the same ascended 13.6% on a currency-neutral basis. Currency-neutral sales were fueled by 11.6% gains from ghd and 2% rise in underlying business. Adjusted operating income for Professional tumbled 9.8% to $90.2 million.

On a region-wise basis, net revenues increased 6.1% in North America, driven by gains from Younique and strength in Tiffany and Gucci Bloom, somewhat countered by weakness in U.S. Consumer Beauty. Sales in Europe improved 13.7% thanks to ghd’s contributions, success of Tiffany and Gucci Bloom, and mass fragrances and retail hair. Sales at the ALMEA region jumped 30.9% on a reported basis, courtesy of solid growth across all segments.

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $400.1 million, long-term debt (net) of $7,145.8 million and total shareholders’ equity of $9,429.1 million (excluding non-controlling interests).

The company generated net cash from operating activities of $307.8 million in the first half of fiscal 2018. During the quarter, the company generated free cash flow of $195.9 million.

Concurrently, the company announced a dividend of 12.5 cents a share, payable on Mar 15 to shareholders of record as on Feb 28.

On Dec 14, 2017 the company paid dividend of 12.5 cents per share for a total cost of $93.7 million.

Outlook

Management remains pleased with the solid growth at its Luxury business, ongoing momentum at the Professional segment and improvement at its Consumer Beauty segment. The company remains optimistic about the ongoing synergies from buyouts, which have been solidifying its portfolio. Also, innovations and e-commerce operations are driving results.

Given these factors and the year-to-date performance, the Zacks Rank #3 (Hold) company expects modest net revenue growth in the second half of fiscal 2018. Management also expects healthy margin improvement over the second half, with maximum contributions coming from the fourth quarter.

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