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Coty Inc. (COTY) Earnings, Revenues Beat Estimates in Q3

Coty, Inc. COTY posted third-quarter fiscal 2017 results, wherein both earnings and revenues beat the Zacks Consensus Estimate.

Adjusted earnings of 15 cents per share beat the Zacks Consensus Estimate of 11 cents by 36.4%. Adjusted earnings increased 7.1% from the year-ago results, boosted by significant higher revenues and improved gross margins. Higher adjusted operating income partially offset by higher interest expense also led to higher earnings.

Quarter in Detail

The company generated revenues of $2.032 billion in the third quarter beating the Zacks Consensus Estimate of $1.961 billion by 3.6%. Revenues surged 113.7% from the prior-year quarter figure of $950.7 million, driven by the positive contribution from the acquisitions of ghd and Younique.

The acquisition of Brazilian product line Hypermarcas S.A. (Feb 2016) also led the growth and helped the company in expanding in the world’s third largest beauty market. However, currency negatively impacted revenues by $17.4 million.

Excluding acquisition impact, net revenues of the combined company of Legacy-Coty and P&G Beauty Business declined 2% on a constant currency basis. This reflects the benefit of approximately 1% from pre-shipments to customers prior to the termination of transition services for North America under the Transition Services Agreement (TSA) signed on May 1.

Adjusted gross margin expanded 150 basis points to 63.3% in the third quarter driven by the addition of the higher gross margin P&G Beauty and Younique businesses. However, adjusted operating margin contracted 50 basis points to 10.3% in the quarter.

Notably, Coty’s shares have been declining since the past year. The stock has declined 31.95% on a year-to-date basis in comparison to the Zacks categorized Cosmetics industry, which gained 18.75%. The industry is part of the top 34% of the Zacks Classified industries (90 out of the 265).

Segment Details

Luxury: The segment recorded net revenues of $634.6 million, which surged 56% compared with Legacy-Coty net revenues in the prior-year period. The growth came on the back of the benefits of P&G Beauty Business acquisition (Oct 2016).

The combined company of Legacy-Coty and P&G Beauty Business recorded an improvement of 1% in revenues. Luxury net revenues of the combined company increased 2% at constant currency, driven by strong momentum in brands including Hugo Boss, Calvin Klein, and Chloe partially offset by declines in philosophy and Marc Jacobs.

Adjusted operating income for Luxury increased 94% to $86.1 million in the quarter, while adjusted operating margin surged 270 basis points to 13.6%.

Consumer Beauty: Consumer Beauty net revenues of $988.6 million soared more than 100%, reflecting gains from the acquired P&G Beauty Business and Younique (Feb 2017). The combined company’s Consumer Beauty net revenues grew 5% on a constant currency basis, reflecting an 11% contribution from Younique and Brazil Acquisition, offset by a 6% decline in the underlying business. This decline reflected continued underlying challenges in the Consumer Beauty division that were partially offset by strong performance in Brazil.

Adjusted operating income for Consumer Beauty increased more than 100% to $121.5 million. Adjusted operating margin expanded 350 basis points to 12.3% in the quarter.

Professional: The segment revenues of $408.9 million exceeded more than 100% in the quarter, driven by the addition of the acquired P&G Beauty Business and the ghd acquisition (Nov 2016). Professional Beauty net revenues increased 14% on a constant currency basis compared with combined Legacy-Coty and P&G Beauty Business net revenues in the prior-year period. The growth in segments revenues were driven by acquisition of ghd, and strength in professional hair offset by declines in OPI brand.

Adjusted operating income for Professional declined 95% to $0.7 million compared with Legacy-Coty in the prior-year period. Adjusted operating margin was 0.2% versus 26.6% for Legacy-Coty in the prior-year period as the seasonally weak period in the Salon market weighed on the margin profiles of both Salon Hair and ghd.

Coty Inc. Price, Consensus and EPS Surprise


Coty Inc. Price, Consensus and EPS Surprise | Coty Inc. Quote

Acquisition Update

Coty entered into an agreement on Apr 3 to acquire the exclusive long-term global license rights for Burberry Beauty luxury fragrances, cosmetics and skincare. Under the agreement, Coty will develop, manufacture and distribute the full range of Burberry Beauty products globally. The deal is expected to close in the fourth quarter of 2017.

Zacks Rank & Key Picks

Coty currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the consumer staple sector include Inter Parfums, Inc. IPAR, e.l.f. Beauty Inc. ELF and ConAgra Foods Inc. CAG. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While ConAgra Foods has a long-term earnings growth rate of 8%, the same for e.l.f. Beauty is 20.0%. Inter Parfums has delivered an average positive earnings surprise of 15.6%.

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