COTY Q4 2025: Expects >$1B EBITDA despite tariff headwinds
- Robust Innovation Pipeline: The management highlighted a series of blockbuster product launches, notably the Hugo Boss Beyond bottle—described as the biggest launch in the company's history—and additional innovative fragrance mist initiatives, which are expected to drive consumer demand and boost sales.
- Sequential Growth in H2: The guidance provided indicates that after a challenging first half with retailer inventory destocking, H2 is expected to return to growth with improved sell-out performance and a rebalancing between sell-in and sell-out, positioning the company well for fiscal '26.
- Margin Improvement and Cost Control: Despite tariff headwinds in H1, management is taking strong productivity actions and leveraging savings from procurement and manufacturing to mitigate these impacts, supporting an EBITDA target above $1,000,000,000 for the year.
- Significant Tariff Headwinds: The company is facing major headwinds from tariffs that are already impacting gross margins and driving down EBITDA in the early part of the year, necessitating aggressive productivity actions to offset these costs.
- Dependence on a Risky H2 Turnaround: The outlook relies heavily on sequential improvements and a sharp reduction in inventory destocking—from as high as 11% down to near zero by Q3 fiscal 2026—which introduces uncertainty if macro conditions or execution falters.
- Macro Volatility and Intensifying Promotional Pressures: Increased promotional activities by competitors, coupled with retailers' inventory reduction and broader macro uncertainties, may exacerbate volatility in consumer demand and further pressure margins.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Sales | Q1 FY26 | no prior guidance | Sequential improvement expected | no prior guidance |
EPS | Q1 FY26 | no prior guidance | Specific EPS guidance was not detailed | no prior guidance |
Sales | Q2 FY26 | no prior guidance | Sequential improvement expected | no prior guidance |
EPS | Q2 FY26 | no prior guidance | Specific EPS guidance was not detailed | no prior guidance |
Full-year EBITDA | FY26 | no prior guidance | Projected to exceed $1,000,000,000; tariffs expected to create a $50,000,000–$55,000,000 net headwind | no prior guidance |
Free Cash Flow | FY26 | no prior guidance | Growth in free cash flow is anticipated | no prior guidance |
Inventory and Working Capital | FY26 | no prior guidance | Focus on reducing inventory levels and tightly managing working capital, with expectations to return to a normal cash cycle by calendar year 2026 | no prior guidance |
Innovation and Market Strategy | FY26 | no prior guidance | Growth supported by strong innovations, new product launches, and increased media support for brands | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Product Innovation & New Launches | Q1–Q3 discussions emphasized a robust innovation pipeline with blockbuster launches, targeted innovations in both Consumer Beauty and fragrances, and the introduction of agile beauty and mascara category initiatives (e.g., Rimmel and CoverGirl playbooks, Gucci Flora Orchid and early Marc Jacobs initiatives) | Q4 highlights a series of blockbuster fragrance launches (e.g., Burberry Goddess and Boss Bottled Beyond), mass fragrance successes (Adidas Vibe driving 20% growth) with additional launches in cosmetics (CoverGirl and Rimmel innovations) and future pipeline expansions (Marc Jacobs Makeup, Swarovski Fragrance, Beautylands under Marni and Etro) | Consistent emphasis on innovation with a sharper focus on blockbuster launches and an expanded future pipeline in Q4. |
Cost Management & Margin Improvement | Prior periods (Q1–Q3) focused on structured cost-saving initiatives, productivity and procurement improvements, significant gross and EBITDA margin expansions (with improvements in forecast accuracy via a new global planning hub and the use of AI) and emphasized structural and strategic interventions | Q4 detailed an adjusted gross margin performance with a 190 basis point decline in Q4 due to a lower revenue base and promotional pressures despite overall productivity savings; it reiterated ongoing cost savings programs (including “All in to Win”) and manufacturing adjustments | Overall cost management strategies remain in place though Q4 sentiment is slightly more negative due to margin contraction in the near term. |
Tariff Headwinds & Supply Chain Disruptions | Earlier calls (Q1–Q3) discussed potential customs taxes (10–20%), dual sourcing, inventory build-ups, and supply chain disruptions stemming from COVID and supply crises; mitigation strategies included transferring production and leveraging global manufacturing capabilities | Q4 intensifies focus on tariff headwinds with newly imposed 15% U.S. tariffs on European imports and 30%+ tariffs on Chinese components; mitigation measures include transferring fragrance manufacturing to the U.S., building inventory, and implementing mid-single-digit price increases | Persistent challenges with tariffs and supply chain, with Q4 providing more detailed mitigation actions and an increased emphasis on localized production. |
Inventory Management & Retailer Behavior | Previous periods (Q1–Q3) noted cautious retailer behavior, tight inventory management, and gradual adjustments supported by a new global planning hub and demand planning improvements; discussions highlighted differences between sell-in and sell-out trends and retailer discipline driven partly by e-commerce dynamics | Q4 describes significant retailer inventory destocking, recalibration of working capital (notably in the U.S.), and resulting sales declines (9% decline in like‐for‐like sales) due to aggressive inventory reduction and a more promotional environment | Similar issues remain but Q4 sentiment has become more negative with pronounced destocking impacting near-term performance. |
Macro-Economic Uncertainty & Market Volatility | Across Q1–Q3, executives described an environment marked by volatility from geopolitical tensions, tariff uncertainties, and regional market disruptions; while expressing resilience and strategic adaptations, the discussion included expectations of a transition year with moderated growth | In Q4, the narrative emphasizes a challenging macro backdrop with persistent uncertainties, compounded by retailer destocking, tariff impacts, and softer consumer sentiment resulting in weaker performance indicators | Ongoing uncertainty remains a consistent theme; Q4 sentiment is somewhat more bearish as multiple pressures converge. |
Competitive Pressures & Shifts in Consumer Preferences | Earlier periods (Q1–Q3) highlighted competitive pressures from emerging indie brands, disruptions in the color cosmetics space, rapid shifts in consumer behavior toward digital channels and fragrance categories, and strong online advocacy driving growth for heritage brands | Q4 notes intensified competition in mass cosmetics (with U.S. market share losses in both prestige and consumer beauty), a shift toward value-seeking behaviors (e.g., Gen Z migrating to fragrances), and a more promotional environment impacting margins | Competitive pressures remain significant with Q4 revealing deeper market share losses and a clear consumer shift toward fragrances over traditional color cosmetics. |
Digital Transformation & E-commerce Growth | Q1–Q3 discussions underlined strong e-commerce growth, strategic partnerships (notably with Amazon and TikTok Shop), and significant digital transformation efforts including AI-driven planning and content creation; successes were measured by substantial growth in online sales and digital advocacy metrics | Q4 achievements include reaching CHF 1,000,000,000 in e-commerce revenues, robust social media advocacy across multiple brands, and continued emphasis on omnichannel strategies and AI implementation; partnership expansions remain central | Consistent, strong positive momentum in digital channels and e-commerce, with Q4 milestones reinforcing the transformational journey. |
Regional Market Dynamics & Expansion Challenges | Q1–Q3 conversations addressed regional disparities: challenges in China and Travel Retail Asia, structural adjustments in the U.S., and geographic diversification into emerging markets; leaders noted limited China exposure and growth in regions like South Africa and Southeast Asia | Q4 highlights U.S. market headwinds with significant market share losses in both prestige and mass beauty, while global regions such as Europe, Middle East, APAC (excluding U.S.), and emerging markets continue to perform well; new U.S. leadership and structural changes were also announced to drive agility | Regional challenges persist with a pronounced U.S. underperformance in Q4, counterbalanced by strong international markets; the focus on restructuring suggests efforts to mitigate these disparities. |
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Tariff Impact
Q: How do tariffs affect EBITDA?
A: Management explained that despite a rough $50 million tariff headwind, proactive productivity actions and procurement efficiencies are expected to alleviate the impact—leaving about a $20–25 million relief window that helps ensure EBITDA finishes above $1 billion for the year. -
Destocking Trends
Q: When will destocking normalize?
A: They expect the destocking gap to narrow—from 11% at the start to 5% in Q4 2025—and then gradually close to nil by Q3 fiscal 2026, aligning sell-in with sell-out especially in the U.S. market. -
Cash Flow & Financing
Q: What are cash flow priorities and refinancing plans?
A: The team is focused on cash deleveraging by tightening working capital and controlling inventory, with plans to refinance maturing debt in 2026 and potentially use swaps for a share buyback when conditions improve, supported by strong EBITDA trends and recent rating upgrades. -
H2 Initiatives
Q: What initiatives drive H2 improvement?
A: Management highlighted that once retailer inventory headwinds end, innovative launches—like the blockbuster Hugo Boss Beyond and a new body mist strategy—will boost sell-out performance and drive top-line growth in H2. -
Innovation Fatigue
Q: Is the market experiencing innovation fatigue?
A: They noted that after an intense period of frequent product launches, especially in color cosmetics, consumers have grown weary; meanwhile, fragrances continue as a simple and effective category, maintaining steady growth. -
Travel Retail
Q: How is Travel Retail evolving?
A: Management is repositioning Travel Retail as a discovery destination by offering exclusive launches—such as the initial debut of major products—resulting in solid growth in the Americas and EMEA, though Asian travel retail still faces challenges due to Chinese market pressures. -
Consumer Beauty
Q: How is investment shifting in mass beauty?
A: They are moderating spending in mass color to boost profitability while leveraging the bright performance of the mass fragrance segment, which contributes about 7% of net revenues, reflecting a more measured, ROI-driven strategy. -
Prestige Portfolio (Excluding Fragrance)
Q: How did prestige, excluding fragrance, perform?
A: Management reported that prestige portfolios apart from fragrances have shown resilient sell-in and sell-out trends, although results varied by region—with a notable impact from shifting reseller channels in Asia. -
Prestige Demographics
Q: Are key prestige demographics pulling back?
A: They observed that core segments including Gen Z, Hispanic, and male consumers continue to engage robustly—evidenced by increasing multiple fragrance ownership—indicating sustained demand across the board.
Research analysts covering Coty Inc.