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Coty Posts Sales Gains — Even in the Consumer Division

"When you do all this together and you double the level of working media — the result is there," said CEO Sue Nabi.

Coty Inc. stock closed up on Monday, after the business posted sales growth and unveiled plans to lower its stake in Wella. 

The company’s stock price closed up about 15 percent, to $10.69 on Monday — the highest it’s been all year.

The beauty business posted sales gains across categories for the most recent quarter, lapping declines earlier in the pandemic. 

For the quarter ended Sept. 30, Coty posted net sales of $1.37 billion, a 22 percent uptick from the prior-year period. Net income was $228.9 million, up slightly from $227.3 million a year ago.

Wall Street analysts reacted positively to the results, and Citi’s Wendy Nicholson said they were “much better than expected,” in a note Monday morning. 

“Coty has shown unexpected resilience through COVID-19 with fragrances outperforming the rest of luxury beauty as consumers turn to self care at home. Under the leadership of Sue Nabi, we believe Coty will continue to experience improved momentum through market share improvements and eventual recovery of the makeup category as consumers start to become more mobile, though we acknowledge the U.S. will lead Europe in this regard,” wrote RBC analyst Nik Modi. 

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“Investors should view the [quarter’s] result as evidence the latest turnaround is on track,” wrote Stifel analyst Mark Astrachan. 

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Coty has also agreed to sell an additional 4.7 percent stake in Wella to KKR, on top of the 9 percent stake it sold to the private equity firm in October. The transaction lowers KKR’s stake in Coty to 2.4 percent, and is meant to further simplify the company’s capital structure. Coty now owns 25.9 percent of Wella.

“What we are seeing is that this quarter is the fifth quarter of overperforming the expectations,” chief executive officer Sue Nabi said in an interview. “This is new, that we’re overdelivering on our expectations. This quarter is very specific, because for me, it’s a quarter that illustrates who is and how does the new Coty act.”

How Nabi’s Coty acts includes growth, she said, in both the prestige division, and the consumer division, which has had troubles over the past several years.

“It’s a quarter where we are, in a way, demonstrating our ability to grow our profitability with a very strong improvement in our adjusted gross margin,” Nabi said. “It’s a quarter where we are also demonstrating that we have on one side profitability improvement and on the other side we are continuing to do our cost-saving program. We are around $400 million saved at the end of the quarter…the two together combined with a huge pipeline of great innovations in prestige and great reboots on the mass market, when you do all this together and you double the level of working media — the result is there.”

Coty’s prestige division, which houses Gucci Beauty, Kylie Cosmetics and other lines, posted a 35 percent net sales increase, to $870.7 million in the quarter with adjusted earnings before interest, taxes, depreciation and amortization of $215 million. The consumer division, which houses Cover Girl, Rimmel, Max Factor and other brands, reported a 4 percent net sales increase, to $501 million in sales, with EBITDA of $63.5 million.

Nabi said Coty saw growth in brick-and-mortar sales and e-commerce, which was up 23 percent in the quarter.

The prestige division did well due to strong fragrance sales, especially with Gucci Flora Gorgeous Gardenia and Burberry Hero.

Nabi said Gucci Flora is “the biggest launch of prestige in the third quarter this year” and has seen success across the U.S. and Europe, as well as China, where it is a top 10 fragrance. Burberry Hero, she said, has the “potential to become the next big icon for Burberry.”

Chloé’s Atelier des Fleur, an artisanal offering, is seeing traction in China and across Asia, Nabi said. “We are going to globalize this one as soon as we can so that we can benefit from the good winds that are behind high-end and niche fragrances that are booming everywhere around the world, but specifically in China, which is probably going to become the biggest market for these kind of fragrances,” Nabi said.

Makeup also did well, Coty said, with strong performance from Gucci and the relaunch of Kylie Cosmetics. 

Coty plans to increase its focus on skin care going forward, with a relaunch of Kylie Skin, the debut of Kim Kardashian West’s skin care line and a revamp for Philosophy. The business is also working to grow Lancaster in the China market, Nabi said.

In 2019, skin care made up about 5 percent of Coty’s total sales, Nabi said, but the division has been growing. Lancaster has “people queuing in front of counters in Hainan,” Nabi said, and Coty plans to grow that brand across China and Asia.

“Philosophy in America is up to be rebooted the same way we’ve rebooted Cover Girl and Lancaster, but the brand has been doing very well,” Nabi said, adding that it was the number eight skin care brand in the U.S.

Nabi said Kardashian West’s skin care line will be rolled into English-speaking markets, mainly in the U.S. and Europe, next year.

In the consumer division, which has struggled since Coty bought 41 brands from Procter & Gamble in 2016, things are looking up. Nabi said Cover Girl has gained market share in four of the last seven months, and that the relaunches of Rimmel and Max Factor are off to strong starts.

“We think we found the recipe to take back Cover Girl to the way it used to be,” Nabi said, highlighting the brand’s clean makeup initiatives, and opportunity to grow Outlast Lip Color.

Sally Hansen is also growing, Nabi said. “We are taking the recipes of success of Cover Girl and Sally Hansen in America to Rimmel,” she said. Rimmel launched a line called Kind and Free that includes foundations, powders, concealers, mascaras and nail polish that are all clean and vegan. “The first figures we got in the U.K. where the range started two weeks ago are super, super encouraging,” she said.

Max Factor is also back to market share gains in 70 percent of its key market in Europe, Nabi said, crediting the new image of the brand, which includes Priyanka Chopra as its face and key products like FaceFinity Foundation.

Coty ended the quarter with nearly $5 billion in debt, a $200 million improvement, the company said. The company predicts sales growth to be in the low- to mid-teens percentage, and expects fiscal year 2022 EBITDA of at least $900 million, it said.

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