Q3 2024 Earnings Summary
- Coty's Prestige fragrance segment is showing strong growth, driven by successful launches like Burberry Goddess, which is the #1 innovation globally, and other key brands like Marc Jacobs Daisy and Kylie Cosmic. This overperformance provides confidence in sequential acceleration in like-for-like sales in the first half of fiscal '25.
- E-commerce sales are significantly contributing to growth, now representing about one-fifth of Coty's business. Consumer Beauty e-commerce sales grew by close to 30% in the last quarter, driving half of the division's growth.
- Coty is achieving gross margin expansion across both Prestige and Consumer Beauty divisions through productivity initiatives, targeted pricing, and mix management, moving towards a gross margin target of 65%.
- Weakness in U.S. mass cosmetics market: Coty has observed a slowing in U.S. mass cosmetics, with factors such as moderating pricing benefits, consumers being stocked on some products, and a decline in cosmetic household penetration across age groups, particularly due to economic pressure on lower-income consumers. This softness may continue to impact Coty's Consumer Beauty division.
- Dependence on Prestige fragrances for growth: Coty's growth is heavily reliant on its Prestige fragrances, with the CEO noting that the performance in Prestige is giving confidence for future acceleration. Any slowdown in the fragrance market or increased competition could pose risks, especially since the fastest-growing segment is pure-play niche fragrances, where Coty is still developing its presence.
- Challenges in U.S. brick-and-mortar sales: While e-commerce sales are strong, Coty acknowledges that U.S. brick-and-mortar performance was not as high as e-commerce, and they are working to reinvent the shopping experience. This indicates potential challenges in traditional retail channels, which are important for overall sales.
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Potential for Higher Guidance
Q: Could guidance have been higher given momentum?
A: Management believes guiding at the upper end of 9% to 11% growth is an outstanding performance and possibly best in class among peers. They are confident due to strong Prestige performance and expect continued acceleration, even without easy comparatives. -
Restocking Headwinds
Q: Is a mid-single-digit restocking headwind expected in Q4?
A: Yes, a mid-single-digit headwind is anticipated in Q4 due to prior year's restocking and pricing of innovations. This is in line with previous guidance, and consumption and shipments are fully aligned with no inventory buildup at retailers. -
Prestige vs Mass Mix
Q: How does Prestige vs Mass mix impact gross margin?
A: Gross margin has improved significantly to around 65%, driven by both divisions through productivity initiatives, targeted pricing, and mix management. The expansion is not just a mix effect, and management expects continued gross margin improvement by balancing volume, mix, and pricing. -
U.S. Mass Cosmetics Slowdown
Q: Why is U.S. mass cosmetics slowing?
A: The slowdown is due to reduced pricing benefits, consumers being stocked on products, economic pressures on lower-income consumers, and shifts to channels not captured by Nielsen. Additionally, younger consumers are trading up to masstige brands. Coty is adjusting by focusing on e-commerce, new channels, and innovative products. -
Fragrance Market Acceleration
Q: What's driving fragrance market acceleration?
A: The fragrance market is accelerating globally, not just due to Travel Retail. Drivers include the "fragrance index" structural trend, with volumes and premiumization increasing. Coty is outperforming with successful launches like Burberry Goddess, Marc Jacobs Daisy Wild, and Kylie Cosmic fragrances. -
E-commerce Performance
Q: What's driving strong e-commerce growth?
A: E-commerce now represents about 20% of the business, with Consumer Beauty e-commerce sales up nearly 30%. Growth is driven by digital marketing, influencer engagement, and viral products. Coty plans to expand e-commerce partnerships, including with key retailers like Amazon. -
New Partnerships' Growth Contribution
Q: How will new partnerships affect long-term growth?
A: New licenses like Etro and Marni will add incremental growth by targeting new audiences and expanding categories. These brands bring unique visions and complement Coty's portfolio, contributing to long-term growth. -
Promotional Environment
Q: What are expectations for promotions?
A: The promotional environment remains stable with no major changes expected. Coty is focusing on premium innovations rather than increasing promotions and does not foresee significant promotional activity heading into the holiday season. -
Lancaster and Men's Fragrances
Q: Plans for Lancaster expansion and men's fragrances?
A: Lancaster will expand activities in Europe and Asia, focusing on skincare and sun care. Men's fragrances like Hugo Boss are performing well, with plans for new launches to drive growth in this segment. -
Global Growth Sustainability
Q: Is growth in Asia and Travel Retail sustainable?
A: Management sees balanced growth across regions without overreliance on Asia or Travel Retail. They have prepared multiple growth engines in categories and regions, including strong performance in Southeast Asia and expanding skincare offerings. -
Brick-and-Mortar Trends
Q: How is U.S. brick-and-mortar performing?
A: While e-commerce is outperforming, brick-and-mortar performance is not as strong. However, brands like CoverGirl are resisting well in stores. Coty is working with partners to reinvent the in-store experience to improve performance. -
Sequential Acceleration Drivers
Q: What's driving sequential acceleration in H1 FY25?
A: Acceleration is driven by strong Prestige performance, successful fragrance launches, increased pace of innovation in Consumer Beauty, and dynamic beauty markets globally. Management is confident despite not having easy comparatives. -
Fragrance Category Breakdown
Q: What's driving growth among fragrance segments?
A: The fastest-growing segment is pure-play niche fragrance brands not tied to fashion or beauty brands. Coty is capitalizing on this trend with launches like Infiniment Coty Paris while continuing to grow designer brand fragrances through innovation and collections.