Q2 2024 Earnings Summary
- Coty's expansion into the ultra premium fragrance market, which is outgrowing the Prestige segment, positions the company to capture significant growth opportunities. Successes include Burberry Goddess, the biggest launch ever at Coty, and other high-performing brands, contributing to continued outperformance.
- E-commerce is a strong growth driver for Coty, with high 20% growth contributing to 40% of Q2 growth, and e-commerce penetration increasing by 180 basis points, also being strongly margin accretive. This boosts profitability and overall revenue growth.
- Coty's strategic focus on digital marketing and social media activation yields higher ROI compared to traditional media, particularly effective with Gen Z and millennials, leading to increased market penetration and supporting continued outperformance.
- Coty's intentional slowdown in skincare expansion may delay growth expectations in this segment, potentially impacting the company's ability to double the skincare business by fiscal '26. Sue Nabi stated they are taking more time to ensure perfect execution: "I decided intentionally to slow down our skincare openings... it's not to go fast; it's to do the right thing."
- Normalization of the Prestige fragrance market growth could make it challenging for Coty to sustain its current level of outperformance. While the company expects the market to grow at mid- to high single digits, this is a deceleration from previous periods, and difficult comps are approaching. Analysts expressed concerns about this, and Coty acknowledged that the market is normalizing.
- Increasing inventory levels amidst expectations of market normalization could pose risks. Coty has increased inventory to support big launches like Burberry Goddess, but if demand does not meet expectations due to the normalizing market, the company may face excess inventory. An analyst questioned this strategy: "Why increase inventory... if you think category growth is going to slow?"
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Margin Outlook
Q: Are you still on track for margin expansion in H2?
A: Laurent Mercier reaffirmed guidance, expecting 10 to 30 basis points EBITDA margin growth in the second half. He highlighted significant gross margin expansion due to cost inflation softening, carryover of price increases, and productivity efforts. Despite some headwinds from currency and the Lacoste exit, they expect continued margin improvement in H2 and for the full year. -
Prestige Fragrance Outlook
Q: Can you keep outperforming as the fragrance market normalizes?
A: Sue Nabi expressed confidence in continuing outperformance due to a strong balance of innovation and base business growth. The company has built capabilities over the last three years in creating blockbuster products, effective marketing, and identifying white space opportunities. Laurent Mercier emphasized there's no deceleration, only normalization, and Coty will continue to outperform the market, expected to grow mid- to high single digits. -
Skin Care Strategy
Q: Are you adjusting your skin care plans amid market changes?
A: Sue Nabi stated that skin care remains their biggest opportunity, but they have intentionally slowed down skin care openings to ensure they do it perfectly. They're focusing on protecting brand equity and avoiding over-promotionality, aiming for sustainable, healthy growth in the long term. -
China and Travel Retail
Q: How are China and Travel Retail performing?
A: Sue Nabi reported strong growth in both China and Travel Retail. Travel Retail grew by 40%, with no slowdown in travel demand. In China, Coty outperformed the market by 30 points, driven mainly by Prestige fragrances. They continue to expand skin care brands like Orveda and Lancaster in China. -
E-commerce Growth
Q: What impact does e-commerce growth have on margins?
A: Laurent Mercier noted that e-commerce grew 20%, contributing 40% of Q2 growth and increasing e-commerce penetration by 180 basis points . E-commerce is strongly margin accretive, positively impacting gross margins. -
Inventory Management
Q: Why increase inventory if growth is slowing?
A: Laurent Mercier clarified there's no slowing but normalization, and they increased inventory to support major launches like Burberry Goddess, the biggest ever launch at Coty. They have tight control over inventories, and retailer inventory levels are healthy. -
Pricing Strategy
Q: Will you continue with price increases?
A: Laurent Mercier confirmed they implemented mid-single-digit price increases successfully, with volume growth maintained. Going forward, they will continue targeted price increases but focus more on mix improvement and strategic revenue management to increase price per unit. -
Digital Marketing ROI
Q: How effective is your digital marketing spend?
A: Laurent Mercier stated that ROI on digital marketing is much stronger than traditional media. They focus on social media platforms like TikTok, leveraging influencers to drive engagement, particularly among Gen Z consumers. Sue Nabi highlighted a campaign with 95 million views for Simply Ageless Essence Foundation, driving it to be #1 on Amazon. -
Ultra-Premium Fragrances
Q: What are your plans in ultra-premium fragrances?
A: Sue Nabi discussed investing in ultra-premium fragrances like Miu Miu, Boss Collection, Burberry Signatures, and announced a new license with Marni, a premium fashion brand. They see the ultra-premium segment as the new growth frontier. -
Consumer Beauty Strategy
Q: How will Consumer Beauty contribute to growth?
A: Laurent Mercier explained they expect flat volumes in Consumer Beauty, focusing on mix improvement and strategic revenue management. Volume growth will come from Prestige, supporting their 6-8% midterm growth target.