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It’s Still All About Fragrance at Coty

Net revenue fell in the beauty company's fiscal second quarter, but it beat Wall Street forecasts on both the top and bottom lines.

The fragrance effect is still in play at Coty Inc. despite significant constraints — including an industrywide glass shortage — helping the beauty company beat Wall Street forecasts on both the top and bottom lines in the final three months of last year.

“The ‘fragrance index’ remains at full force, as consumers turn to fragrances as mood-boosting and affordable luxuries in an uncertain environment,” said chief executive officer Sue Y. Nabi, referring to an uncertain economic backdrop in the U.S. with mounting speculation that it could tip into recession this year.

The company cited recent innovations in its prestige fragrance offering, including Burberry Hero Eau de Parfum and Burberry Her Elixir de Parfum, Hugo Boss Bottled Parfum and Gucci Flora Gorgeous Jasmine as delivering strong performances during the quarter. Coty is also seeing increasing demand for fragrances in China and travel retail as the lockdowns ease.

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Recently, Coty sold its Lacoste fragrance license back to Lacoste by mutual agreement for an undisclosed sum, and separately, renewed its license with Hugo Boss. WWD understands Lacoste has a big footprint in Russia, an area which Coty has divested from due to its invasion of Ukraine.

Coty’s strong performance in fragrance comes as the industry continues to grapple with a shortage of glass and other materials such as oils and alcohol, as the war in Ukraine has led to a shortage of ingredients, while the energy crisis has driven up glass prices.

“Supply shortages are an industrywide element. All companies have been facing this,” said Nabi in an interview with WWD. “We’ve been navigating this quite successfully….we’ve been able to post 6 percent like-for-like growth in the prestige division.”

When asked by an analyst on a post earnings call if the shortages had impacted innovation, Nabi responded that they had not.

Overall, Coty’s net revenues came in at $1.52 billion in the company’s fiscal second quarter ending Dec. 31, down 3 percent year over year, but slightly above analysts’ forecasts for $1.5 billion, according to a Factset poll.

Prestige net revenues, which include Gucci Beauty, Kylie Cosmetics and SKKN by Kim, were $957.7 million or 63 percent of Coty sales, decreasing by 5 percent, due to 8 percent negative FX impact.

Consumer beauty net revenues were $565.9 million, down by 1 percent, due to 7 percent negative FX impact. Coty saw strong momentum in most of its key brands, with single-digit to double-digit revenue growth across CoverGirl, Rimmel, Max Factor, Adidas and Monange.

Of the sales numbers, Olivia Tong, an analyst at Raymond James, said: “Coty highlighted the robust consumer demand for prestige fragrance, with the market growing at a high single-digit rate vs a mid single-digit in mass markets. Importantly, Coty is seeing improved service levels for prestige as it enters F3Q, and saw a sequential sales acceleration in January.”

Net income, meanwhile, was $235 million, up from $188.9 million in the prior year. Earnings per share came in at 27 cents, up from 23 cents. On an adjusted basis, earnings per share were 22 cents. Analysts had been expecting 15 cents, according to Factset.

Coty now expects FY23 adjusted EPS growth of more than 20 percent to between 35 cents and 36 cents, an increase from its previous adjusted EPS guidance of between 32 cents and 33 cents. The company continues to expect full-year revenues for the core business to grow 6 to 8 percent on a like-for-like basis.

“I am incredibly pleased that Coty has delivered its 10th consecutive quarter of results in line to ahead of expectations, with the majority of quarters ahead, even as the external environment remains highly complex, with particular pressures this quarter from component shortages and FX. This delivery confirms the strength of our brands and our teams, and the growing nimbleness of our organization which will position us well to succeed in a variety of macro scenarios,” said Nabi.

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Nevertheless, its stock was down more than 3 percent to $10.03 amid broader market declines.