EU CONSUMER CYCLICALS: Coty: 1Q Results

(COTY: Ba1/BBB- Neg/BBB-) 

Seeming refusal to disclose Gucci license contribution to earnings makes us somewhat nervous. Reminder no brand >10% of sales but speculation is if it could be a larger contributor on EBIT. On sales it is lagging market by 5-8ppt even on sell-out (i.e. ignoring retailer inventory right sizing actions). Potential asset sales are being lined up to help delever balance sheet - Wella sell-down in particular we would see as credit positive while mass cosmetics and Brazil business would depend on sale multiple achieved.

3m to Sept:

• Sales $1.6b, -8% LFL. Net of FX -6%.
  • prestige $1.1b -6% (sell-out +1%, market +6%), consumer $0.5b -11% (sell-out -6%, market +2%)
  • Americas $0.65b -6%, EMEA $0.8b -9%, APAC $0.2b -9%
  • Notes small China prestige exposure did well; sell-out +15%, >2x market growth
• Gross margin 64.5%, -100bps
• Adj. EBIT $241m, -21% y/y
  • Statutory $185m, -22% y/y. Gap on $39m in amortisation and $15m stock compensation, similar to last yr and both non-cash
• Cash flows were similar to last year
• Net debt $4.1b, levered 3.7x vs. 3.4x LY
  • The $900m new 31s alongside Q2 FCF will be used to pay down all of this years $1.2b wall
• 25.8% stake in hair-care brand Wella valued at $1b (unch)
  • "actively pursuing the monetization of Wella" to delever

On Gucci License and strategic review:

• Would not comment on an analyst asking about a lawsuit filed by Coty against Kering for breach of contract
• On Gucci exposure refused to give more detail outside reiterating no brand makes up >10% of sales and adding that the rest of portfolio (85% of sales) in 7y+, perpetual or owned licenses/brands.
• On strategic review: $400m in sales Brazil business is painted as strong performer and "very profitable" and it implies this will be sold and likely soon. The colour cosmetics side ($1.2b in sales) it wants to attempt to fix earnings before evaluating options.
  • reminder the colour cosmetics business may be FCF negative

2Q Guidance largely unch:

• LFL sales now at better end of prev. -3-5% range
  • FX tailwind in low to mid-single digit
• 2Q EBITDA down low to mid teens (i.e. -13-16%) (unch)
• 1H FCF > $350m (vs. $411m LY) (unch) (seasonally positive only in 1H)

Continues to expect both to turn to growth in 2H driving:

• $1b in EBITDA (vs. $1.1b LY)
• Leverage at 3.5x (unch y/y)