Coty Inc. (NYSE:COTY) Q3 2024 Earnings Call Transcript

This has driven solid overall sales growth fiscal year-to-date, supported by double-digit percentage growth in skin care lines. And, philosophy’s direct to consumer channel is delivering very strong results, with increased conversion rate and double-digit percentage growth year-to-date following the relaunch of the DTC website. Finally, on Orveda, while the distribution still remains very selective, we’re continuing to generate strong buzz around the brand, which is translating into significantly higher productivity Fiscal year-to-date, Orveda’s productivity grew 3 times to 5 times year-over-year, and we added new doors as we continue to thoughtfully expand our footprint in the luxury retail skin care space. Moving to our fourth strategic pillar, step-changing our organizational growth capabilities, including digital and R&D.

In Q3, both divisions delivered very strong e-comm sales momentum In Prestige, double-digit percentage e-comm channel growth was driven by new product launches during the quarter, coupled with strong social media activations and collaboration with e-retail partners. In Consumer Beauty, growth was approximately 30% was supported by nearly all regions, led by the U.S., LATAM and Europe. The strong growth in both divisions drove overall e-commerce Q3 revenue growth of approximately 20% year-over-year. As a result, our e-commerce penetration expanded by approximately 190 basis points, which drove total e-commerce penetration to nearly 20% fiscal year-to-date Once again, our e-commerce market share grew in both Prestige and Consumer Beauty In fact, I’m proud to share that both our Prestige fragrances and Consumer Beauty businesses now rank number two amongst our beauty peers in the e-commerce channel.

We’ve succeeded in the e-commerce channel through best-in-class online launches, the success of our accelerating digital advocacy strategy and active participation in key online shopping events while simultaneously premiumizing the portfolio, and increasing digital media competitiveness. And touching on R&D, while we have been increasing our R&D spend in recent years, we’re focused on continuing to significantly grow our R&D over the next several years, without out fiscal year-to-date spend up double-digits. Moving tour fifth strategic pillar, which is expanding in the Travel Retail channel, in China and other growth engine markets. Beginning with growth engine markets, where we are unlocking key geographic white spaces. Coty’s revenues in these markets grew strongly at over 20% in the third quarter and fiscal year-to-date, reaching approximately 18% of Coty sales.

We saw very strong momentum across Brazil, the rest of LATAM, Southeast Asia, including India, and Africa, which all grew by very strong double-digit percentages in Q3 and fiscal year-to-date. In China, our Prestige business, which accounts for roughly 80% of our China sales, grew net revenues by a strong double-digit percentage like-for-life in Q3 including triple-digit growth in Hainan, while Consumer Beauty sales were lower. Finally, we are continuing to see outstanding momentum in our Travel Retail channel sales Coty’s Travel Retail channel sales grew over 20% like-for-life in both Q3 and year-to-date, even after cycling over 30% growth in fiscal ‘23, as we continue to gain share fueled by distribution expansion, Travel Retail launch exclusivities, successful innovations and our growing multi-category presence.

Importantly, the strong growth momentum in this channel continues to be broad-based across all regions, with double-digit percentage sales growth in Europe, Americas and APAC The channel now accounts for approximately 9% of our business fiscal year-to-date, up from approximately 8% last year. Turning tour sixth and final strategic pillar, which is becoming an industry leader in sustainability, which reinforcing our business for the long-term. I’d like to highlight a few of our ESG milestones reached during the quarter: First, we’re excited to announce that we now have eight carbon neutral sites, labs and offices. And, we’ve expanded solar panel use across four sites. We are also continuing to steadily expand refillable formats, including Cosmic Kylie Jenner and Infiniment Coty Paris, and implementing screw neck caps for new prestige fragrance bottle designs.

Additionally, following our breakthrough introduction of carbon-captured ethanol in our fragrances, Infiniment Coty Paris is the first globally distributed full fragrance collection manufactured using 100% carbon-captured ethanol. And, finally, we continue to make solid improvements in our ESG scores across the leading rating platforms, including ISS ESG, where Coty was awarded Prime Status, putting Coty on par with industry leaders. While there is still a lot of work to be done, I am very proud of the progress we’ve made in Q3, and we’ll continue to be guided by our Beauty That Lasts sustainability framework. And that brings me tour outlook for fiscal ’24. Before I discuss our guidance, I want to frame the results we delivered fiscal year-to-date and our expectations for the fourth quarter.

The beauty market remains a strong and outperforming category, even as over time, we expect the exceptional growth of the past two years to converge closer to medium term trends. As you can see, in Q3 the prestige fragrance market growth accelerated sequentially to mid-teens percentage growth. On our side, we experienced a minor impact from restocking last year, with Coty’s prestige fragrance business outperforming the market. Importantly, we outperformed the market in Q3, with our sell-out growing high-teens percentage. Looking to Q4, we anticipate continued strength in category demand. At the same time, we’re expecting a mid-single-digit percentage headwind tour Prestige shipments and revenues due to difficult comparisons last year, as retailers restocked their supply in conjunction with improvements in our service levels.

Of course, on a sell-out basis we target to continue to outperform the market. All of this sets the stage for Coty’s LFL growth to accelerate sequentially into first-half of ‘25 from the anticipated Q4 levels, even when taking into account the very elevated growth we delivered in Q1 of this year With this backdrop, let me share our outlook for Q4. We expect low-to-mid single-digit percentage like-for-life revenue growth in Q4 reflecting an estimated mid-single-digit percentage headwind in Prestige from retailer inventory restocking in the prior year. For reported revenues, in Q4, we expect an FX headwind to revenues of 1% to 2% and a headwind from the divestiture of the Lacoste license of approximately 2%. We expect the significant easing in COGS inflation to drive year-over year expansion in our adjusted gross margin, even if the improvement is more moderate than in Q3 given the more moderate revenue growth.