Coty Reports 3Q22 Sales Growth Ahead of Expectations and Progress Across All Metrics

Strong Sales Momentum in Both Divisions, Fueled by U.S., Europe, and Travel Retail

Meaningful and Continuous Gross Margin Expansion Despite Challenging Environment

Continued Progress on Deleveraging

FY22 Revenue and Profit Reaffirmed, with Adjusted EPS Guidance Raised

NEW YORK–(BUSINESS WIRE)–Coty Inc. (NYSE: COTY) (“Coty” or “the Company”) today announced its results for the third quarter of fiscal year 2022, ended March 31, 2022. The Company delivered another quarter of solid financial progress and continued strong execution across its strategic growth pillars.

In Q3, Coty’s sales increased 15% as reported and 19% on an LFL basis, ahead of its prior guidance of mid-teens LFL growth. Sales were driven by strong results in both Prestige and Consumer Beauty, with overall revenue growth inline with sell-out performance. Geographically, revenue growth was fueled by the continued recovery in many EMEA markets, a strong rebound in Travel Retail, and continued momentum in the U.S. E-commerce maintained its momentum, with double digits e-commerce sales growth in Q3 and YTD, supporting high teens e-commerce penetration, even as stores re-opened.

Coty’s Prestige segment reported very robust sales growth of 21% versus the prior year and 25% on a LFL basis, even as reductions in value distribution had a low single digit negative impact on growth. Prestige fragrance sales continued to accelerate, increasing over 20% in Q3, with particularly strong growth from Gucci Beauty, Chloe, Burberry, and Hugo Boss. This was driven by the continued in-market success of Coty’s Q1 fragrance innovations, Gucci Flora Gorgeous Gardenia and Burberry Hero, combined with the success of Q3 launches of Hugo Boss The Scent Le Parfum and Burberry Her EDT. The two strong female fragrance launches this fiscal year demonstrate clear progress on Coty’s strategy to further elevate its position in the large female fragrance market. Prestige cosmetics nearly doubled YoY in both Q3 and fiscal year-to-date, led by the continued momentum of Gucci Beauty, as well as solid performances by both Burberry and Kylie Cosmetics.

Consumer Beauty revenues increased 8% as reported and 10% LFL in Q3, with strong performance across color cosmetics, mass fragrances, and body care. While the global mass beauty market was moderately positive in the quarter, Coty continued to outperform the market and grow share on a global basis for the past 5 consecutive months. Rimmel delivered market share gains across its key geographies, driven by the success of the Kind & Free cosmetics range. Max Factor, Sally Hansen and CoverGirl also recorded share gains, although temporary supply constraints on CoverGirl’s Clean mascara have weighed on the brands more recent share performance. In addition, the recent re-positioning of Bourjois in its home market, France, has seen strong initial success, with the brand’s growth outpacing the category by ~4x in March, and becoming the #1 mascara in the very competitive French market.

Despite the challenged inflationary environment, Coty continued to generate strong gross margin expansion in the quarter, while also maintaining an increased level of media investment to further fuel revenue and sell-out growth. In Q3, reported gross margins expanded by 240 bps YoY to 64.3%, while adjusted gross margin grew 240 bps YoY to 64.6%. This brings Coty’s year-to-date reported gross margin to 64.0% and adjusted gross margin to 64.2%, a robust expansion of 450 bps YoY, even as inflationary headwinds worsened from less than 1% of net revenues in 1H22 to ~1.5% of revenues in Q3. This substantial gross margin expansion was driven by favorable product and category mix, pricing, and higher volumes. Coty delivered Q3 reported operating income of $57.1 million and adjusted EBITDA of $182.5 million. Year-to-date adjusted EBITDA totaled $772.9 million, reflecting 22% growth YoY.

Financial Net Debt improved by over $200 million to $4.2 billion at the end of Q3, fueled by the $210 million Wella shareholder distribution and the remaining cash proceeds from real estate sales. In the seasonally weak Q3 period, Coty’s free cash flow was only modestly negative, aided by one time benefits as the Company exited the Wella TSA. As a result, the financial leverage ratio of 4.7x exiting Q3 improved sequentially from the 4.9x at the end of Q2. During Q3, Coty’s retained 26% Wella stake was adjusted lower by $210M million to reflect the Wella distribution during the quarter, while its fair value increased by $61 million as a result of stronger results and outlook. As a result, Coty’s Wella stake was valued at approximately $1.03 billion at quarter-end, with the Company’s Economic Net Debt totaled approximately $3.2 billion.

Commenting on the operating results, Sue Y. Nabi, Coty’s CEO, said:

“Our Q3 earnings mark the seventh consecutive quarter of Coty reporting results inline to ahead of expectations. I am extremely proud of the organization for delivering these results, and outperforming the overall beauty market, in an increasingly volatile environment. This confirms that Coty has the brands and the people to win in the beauty market, guided by our strategic priorities of delivering above-market sales growth and expanding gross margin, allowing for brand reinvestment, profit expansion and continued deleveraging.

Our market-leading Q3 LFL sales growth in both Prestige and Consumer Beauty confirm that our decision to step up media investment during Q2 has proven to be the right one. Importantly, our gross margins also showed solid expansion during the quarter, allowing us to maintain a strong level of media investment, while also delivering significant profit performance. The success of the virtuous cycle we have created is even more evident when looking at our year-to-date results, and the strong growth we are delivering across sales, gross margin, media investments, and profitability. I am also pleased to say that Q3 marks another quarter of improvement on debt reduction and free cash flow, with our leverage now at 4.7x and well on track to drive our leverage towards 4x by end of CY22.

During Q3, we continued to execute on each of our strategic pillars. I am pleased to say that our Consumer Beauty business continued to gain market share globally for the 5th consecutive month, a milestone that this business had not achieved in the previous 5 years. Underpinning this market share momentum is our phased approach to brand repositioning, which began with CoverGirl last spring, followed by Rimmel and Max Factor last fall, and most recently Bourjois that has delivered very strong initial results in France. We are also excited by the plans in place for adidas, whose repositioning is on track for late summer 2022.

We maintained outstanding trends within our Prestige fragrance business, even as we further reduced low quality sales, as consumers globally continue to gravitate towards the fragrance category, and our recent innovations continued to resonate with consumers. Meanwhile, we are as confident as ever regarding our expansion into prestige cosmetics, as Gucci Beauty, Burberry, and Kylie continue to deliver great results with plenty of room ahead to further build out both distribution and the product portfolios.

In parallel, we continued to progress in building out our skincare footprint, our third strategic pillar. I am very pleased to say that Lancaster had an outstanding quarter in both Hainan and mainland China, with Lancaster’s iconic 365 Serum resonating with Chinese consumers and rapidly becoming the hero SKU in the portfolio. At the same time, we are continuing to build awareness for CoverGirl’s first-ever entry into skincare. With only five SKUs launched thus far and in-store placement in the cosmetics wall, we are continuing to fine-tune the execution and see lots of opportunity for this range.

Our momentum across Digital – our fourth strategic pillar – continued to build, including double digit e-commerce sales growth, global momentum in brand livestreaming and social commerce, viral activations on TikTok, and the initial deployment of virtual try-on capabilities across markets. We also saw strong performance on our fifth pillar, China, during January and February, though the onset of COVID-related restrictions has weighed on the business exiting March. Importantly, Coty’s Prestige business was once again the fastest growing amongst the leading prestige beauty companies in China, with double-digit sell-out growth in a flat market backdrop.

As we enter the final two months of FY22, the environment remains highly dynamic. Coty is benefiting from several category and market tailwinds led by fragrances, though at the same time, we and the industry face lockdowns in China, the war in Ukraine, inflationary headwinds, and global supply pressures. What is clear is that Coty has navigated this complex backdrop very successfully thus far. We have continued the premiumization of our portfolios in both Prestige and Consumer Beauty, to implement price increases as a means of retaining talent and protecting margins, while also maintaining the necessary flexibility in our supply chain. The strong year-to-date performance on revenues, profit and EPS allow us to confidently confirm our FY22 guidance and even raise our FY22 adjusted EPS outlook to $0.23-0.27.

We remain confident in our short-term and medium-term ambitions, as we continue to strengthen our position as a true global beauty powerhouse.”

Highlights

• 3Q22 net revenues increased 15% as reported and 19% on a LFL basis. Net revenue trends were driven by strong growth in both Prestige and Consumer Beauty.
• Reported operating income totaled $57.1 million in 3Q22.
• 3Q22 adjusted operating income increased to $113.6 million, with a margin of 9.6%, up from $102.2 million in the prior year as depreciation declined.
• 3Q22 adjusted EBITDA was $182.5 million and stable YoY, with a margin of 15.4%.
• 3Q22 reported EPS was $0.06. Adjusted EPS of $0.03, improved from $0.01 last year.
• Consistent with previous outlook comments, net savings were relatively neutral in Q3, bringing to YTD total to over $90 million.
• 3Q22 free cash flow of $(22.2) million improved by $196.2 million from last year driven by higher net income on a cash basis and one-time benefits related to the Wella TSA exit.
• Financial Net Debt was $4,237.7 million, decreased by over $200 million sequentially, supported by the shareholder distribution from Wella and bringing the financial leverage to 4.7x. Economic Net Debt totaled $3,212.7 million at quarter end.
• As previously announced, Wella completed a refinancing of its existing debt in order to fund a shareholder distribution, which resulted in approximately $210 million of cash proceeds to Coty in Q3, with an additional approximately $30 million expected to be distributed by end of June. The Company has since utilized this distribution and cash on hand to recall and fully pay down its 2023 Euro notes a year ahead of schedule.

Outlook

Coty’s strong revenues and sell-out momentum YTD, with LFL sales growth of +17%, reinforces Coty’s confidence that its brand investments are driving attractive ROI and fueling strong topline growth. Taking into account the expected impact in Q4 from Coty’s decision to exit operations in Russia including local Travel Retail, which accounts for approximately 3% of total revenues, as well as the near-term COVID lockdowns in China, the Company continues to expect FY22 LFL sales will be at the upper end of its guidance range of low-to-mid teens percentage growth. Based on current FX rates, Coty expects a headwind of ~4%-5% to its reported sales in Q4.

Coty continues to expect FY22 adjusted EBITDA of $900 million, as the Company navigates the inflationary environment while intentionally reinvesting gross margin gains and costs savings in its brands to maximize value. With FX providing a net benefit at the EBITDA level both in Q3 and YTD, compared to previous expectations for FX headwinds in 2H22, the Company intends to reinvest to fuel topline initiatives while still delivering $900 million in adjusted EBITDA at actual rates.

With the strong YTD EPS delivery, Coty raises its FY22 adjusted EPS guidance to $0.23-0.27, up from its previously guided range of $0.22-0.26. The FY22 adjusted EPS guidance includes approximately 1 cent of net discrete tax benefits expected for the year.

In addition, the Company continues to target leverage towards 4x exiting CY22 and approximately 2x exiting CY25.

Financial Results*

Refer to “Non-GAAP Financial Measures” for discussion of the non-GAAP financial measures used in this release; reconciliations from reported to adjusted results can be found at the end of this release.

Revenues:

• 3Q22 reported net revenues of $1,186.2 million increased 15% year-over-year, including a negative foreign exchange (FX) impact of 4%. LFL revenue increased 19%, driven by a 25% increase in Prestige and a 10% increase in Consumer Beauty.
• Year-to-date reported net revenues of $4,136.1 increased 16% year-over-year, including a negative FX impact of 1%. LFL revenue increased 17%, driven by LFL increases in Prestige of 22%, and Consumer Beauty of 8%.

Gross Margin:

• 3Q22 reported gross margin of 64.3% increased from 61.9% in the prior-year period, while adjusted gross margin of 64.6% increased from 62.2% in 3Q21. The increase was driven by positive intra-category mix-shift, including in both Prestige and Consumer Beauty, price and mix management, and better absorption on improved volumes.
• Year-to-date reported gross margin of 64.0% increased from 59.6%, while adjusted gross margin of 64.2% increased from 59.7% in the prior year period. The increase was due to positive mix-shift, including in both Prestige and Consumer Beauty, and improved volumes.

Operating Income and EBITDA:

• 3Q22 reported operating income of $57.1 million improved from a reported operating loss of $1.4 million in the prior year due to a $26.4 million reduction in acquisition and divestiture related expenses, a $21.8 million real estate sale gain, an $8.8 million reduction in restructuring and other business realignment costs, and higher gross margin, partially offset by higher SG&A expenses stemming from increased marketing investment.
• 3Q22 adjusted operating income of $113.6 million rose from $102.2 million in the prior year, driven by a $12 million reduction in depreciation expense, with the adjusted EBITDA of $182.5 million stable with the prior year as higher sales and gross profit was offset by higher A&CP. For 3Q22, the adjusted operating margin was 9.6%, while the adjusted EBITDA margin was 15.4%.
• Year-to-date reported operating income from Continuing Operations of $318.3 million increased from a reported operating loss of $50.4 million due to lower restructuring and other business realignment costs, reduced acquisition and divestiture-related expenses, increased sales, the real estate gain, and a higher gross margin, partially offset by higher SG&A expenses. Year-to-date adjusted operating income for Continuing Operations increased 41% to $550.4 million, with a margin of 13.3%, while the adjusted EBITDA totaled $772.9 million, growing 22% YoY, with a margin of 18.7%.

Net Income:

• 3Q22 reported net income of $49.6 million improved from a net loss of $1.2 million in the prior year, primarily due to the aforementioned increase in reported operating income.
• The 3Q22 adjusted net income of $27.0 million increased from $5.2 million in the prior year period, primarily due to a $31 million reduction in preferred dividends.
• Year-to-date reported net income of $341.5 million compared to net income of $54.8 million in the prior year. Year-to-date adjusted net income of $237.8 million increased from $97.6 million in the prior year.

Earnings Per Share (EPS) – diluted:

• 3Q22 reported earnings per share of $0.06 improved from a reported earnings per share of $0.00 in the prior year.
• 3Q22 adjusted EPS of $0.03 improved from $0.01 in the prior year.
• Year-to-date reported earnings per share of $0.42 rose from $0.07 in the prior year.
• Year-to-date adjusted EPS of $0.29 increased from $0.13 in the prior year.

Operating Cash Flow:

• 3Q22 cash from operations totaling $24.8 million improved from a cash outflow of $(186.3) million in the prior-year period, reflecting an increase in net income on a cash basis as well as one-time benefit from the exit of the Wella TSA. Year-to-date operating cash flow totaled $759.5 million, an increase of $473.1 million from the same period of the prior year.
• 3Q22 free cash outflow of $(22.2) million improved from a free cash outflow of $(218.4) million in the prior year driven by the $211.1 million improvement in operating cash flow and a $15 million decrease in capex. Year-to-date free cash flow of $626.5 million increased by $483.8 million from the prior year.

Financial Net Debt:

• Financial Net Debt of $4,237.7 million on March 31, 2022, decreased from $4,454.2 million on December 31, 2021. The decrease was driven primarily by the Wella shareholder distribution of $210 million and proceeds from real estate divestitures of $38 million.

Third Quarter Business Review by Segment*

Prestige

In 3Q22, Prestige net revenues of $726.4 million or 61% of Coty sales, increased by 21% versus the prior year. On a LFL basis, Prestige net revenues delivered robust growth of 25%, driven by strength across all regions including continued recovery in most EMEA markets, Travel Retail, and the U.S.

During Q3, the Prestige fragrance category across North America and Europe, continued to generate robust growth, rising over 20% versus last year and versus 2019 levels, led in particular by the U.S. and Italy. In this favorable market backdrop, Coty’s fragrance sales were inline with the market. Coty’s performance continued to be driven by strong results from Burberry, Gucci Beauty, Chloe, and Hugo Boss. Encouragingly, key innovations from Fall 2021, Gucci Flora Gorgeous Gardenia and Burberry Hero, continued to see very strong sell-out performance and remain among the very top selling fragrance innovations in Coty’s focus markets. In addition, Coty’s Spring 2022 innovations are also off to a strong start, with the new Boss The Scent male and female lines driving market share gains for the Hugo Boss brand and the Burberry Her EDT launch quickly becoming the #3 ranked women’s fragrance in the U.S. in March. Meanwhile, in China, performance was strong through January and February, though started to deteriorate as COVID-related restrictions and lockdowns were put in place

Coty continued to make further strides expanding in the white space areas of Prestige cosmetics and skincare during 3Q. Prestige cosmetics sales nearly doubled during the quarter and YTD, driven by strong performances of Gucci makeup, Kylie cosmetics, and Burberry makeup. In skincare, Lancaster had its best month ever during February in Hainan, generating its highest level of sales and outperforming key competitors, driven by particularly strong momentum of its 365 Skin Repair Serum. In addition, Lancaster was the #1 exclusive brand in Sephora China for March.

The Prestige segment generated a reported operating income of $83.8 million in 3Q22, compared to $30.9 million in the prior year. The 3Q22 adjusted operating income was $123.1 million, up from an adjusted operating income of $80.7 million in the prior year, driven by strong gross margin improvement, partially offset by higher A&CP expenses. Adjusted EBITDA for the Prestige segment rose to $155.9 million from $117.1 million in the prior year, with a margin of 21.5%.

Consumer Beauty

In 3Q22, Consumer Beauty net revenues of $459.8 million, or 39% of Coty sales, increased by 8% versus the prior year. On a LFL basis, Consumer Beauty net revenues rose 10%, with strong performance across color cosmetics, mass fragrances, and body care. Encouragingly, all regions generated LFL growth in the quarter.

During the quarter, the total Coty Consumer Beauty business continued to gain market share globally, driven by particularly strong performance of color cosmetics, which increased share by close to 100bps over the last 5 consecutive months. In the U.S., while CoverGirl trends are currently being impacted by temporary supply constraints for its highly successful Lash Blast Clean mascara, the brand continues to drive momentum in its Magnificent 8 franchises while at the same time steadily building consumer awareness and visibility for the brand’s first-ever skincare range. Meanwhile, Sally Hansen’s performance remains strong as it continued to gain share through the quarter.

In Europe, Coty’s performance continued to be driven by the re-positioning of Rimmel and Max Factor, and more recently Bourjois. Rimmel has continued to strengthen its market share across multiple European markets, especially in e-commerce, fueled by the strong momentum for its key launch, Kind & Free clean and vegan makeup line. Meanwhile, Max Factor continued to grow market share across EMEA, including in the UK, where it has reached its highest market share of the last 2 years. And the recent repositioning campaign for Bourjois coupled with the relaunch of its innovative Twist Up mascara, drove Bourjois to outpace the category by ~4x in March in its core France market and increasing by 1 rank to the #3 color cosmetics brand.

The Consumer Beauty reported operating loss was $20.4 million in 3Q22, an increase from $9.1 million in the prior year. The 3Q22 adjusted operating loss of $9.5 million decreased from adjusted operating income of $21.5 million in the prior year, driven by substantial reinvestment in marketing to support the multiple key launches in the quarter, partially offset by higher gross margin in the business. During the quarter, adjusted EBITDA decreased to $26.6 million from $66.3 million in the prior year, with a margin of 5.8%.

Third Quarter Fiscal 2022 Business Review by Region*

Americas

• In 3Q22, Americas net revenues of $479.9 million, or 40% of Coty sales, increased 17% as reported and 17% LFL. This was driven by strong growth of both Prestige and Consumer Beauty. The Prestige performance continued to benefit from very robust fragrance category trends in the U.S., coupled with the strong performance of Coty’s recent fragrance innovations, particularly Gucci Beauty and Burberry. Consumer Beauty was driven by solid growth in key brands CoverGirl and Sally Hansen.

EMEA

• In 3Q22, EMEA net revenues of $548.2 million, or 46% of Coty sales, increased 16% as reported and 23% LFL. The performance was driven by double-digit increases in both Prestige and Consumer Beauty, as markets cycled COVID-related restrictions in the prior year period. At the same time, Coty portfolio continued to perform strongly fueled by market share gains in Gucci Beauty, Burberry and Hugo Boss in Prestige, and Rimmel and Max Factor in Consumer Beauty.

Asia Pacific

• In 3Q22, Asia Pacific net revenues of $158.1 million, or 13% of Coty sales, increased 9% as reported and 10% LFL, with growth fueled by substantial expansion in regional Travel Retail, surpassing pre-COVID levels. During the quarter, China sales started off strong during January and February, but declined during March due COVID-related restrictions.

Contacts

Investor Relations
Olga Levinzon, +1 212 389-7733

olga_levinzon@cotyinc.com

Media
Antonia Werther, +31 621 394495 /

Antonia_Werther@cotyinc.com

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