Exceptional Sales Growth Outpaces Beauty Market, Highlighting Strong Gross Margin and Profitability Expansion

Continued Double-Digit Sell-Out Growth in Prestige Segment, Driven by Robust Demand for Fragrances
Reaffirmation of FY23 Revenue and Profit Expectations
Strategic Commitment to Leverage Achievements Targeting 4x by End of CY22 and 3x by End of CY23
Proactive ESG Strategy Advancing with Top-Tier ESG Rating from Sustainalytics

Coty Inc. (NYSE: COTY) (“Coty” or “the Company”) has reported its impressive results for the first quarter of fiscal year 2023, concluding on September 30, 2022. The Company has showcased remarkable financial progress, demonstrating effective execution across its strategic growth pillars.

In the first quarter, Coty’s sales performance significantly outpaced the broader beauty market, positioning the Company among the leaders in its competitive landscape. Reported sales for Q1 rose by 1%, even with over 7% of foreign exchange headwinds factored in. On a like-for-like (LFL) basis, sales surged by 9%, despite approximately 200 basis points of negative impact stemming from the exit of the Russia business. Consequently, the LFL sales growth exceeded the Company’s revised guidance, which anticipated an increase of 8-9% after accounting for the Russia exit.

During this quarter, consumer demand for beauty products, especially within the prestige fragrance segment, remained exceptionally strong, with estimates indicating that sell-out in Coty’s Prestige division expanded in the low double digits^1. This growth trajectory surpassed the estimated mid-to-high single-digit growth reported in Coty’s Consumer Beauty division. Despite achieving significant LFL growth across both divisions, Prestige growth faced constraints due to widespread supply-chain challenges, particularly exacerbated by heightened demand for fragrances that exceeded expectations, along with the impacts related to Coty’s exit from Russia and specific launch timings.

Coty’s Prestige division exhibited sustained momentum during Q1, bolstered by a flourishing fragrance market and Coty’s commitment to innovation. Although Prestige revenues declined by 1% on a reported basis, they increased by 7% on an LFL basis, despite experiencing around 300 basis points of negative impact due to the Company’s exit from Russia. This growth was also limited by industry-wide shortages of fragrance components and challenging year-over-year comparisons stemming from prior blockbuster launches. Notably, Coty continued its successful track record of launching innovative fragrances, with the new Gucci Flora Gorgeous Jasmine building upon the success of last year’s top-selling Gucci Flora Gorgeous Gardenia, now ranking within the Top 10 in North America and Europe. Similarly, the Burberry Hero EDP launch capitalized on the success of Burberry Hero EDT, propelling the Hero franchise into the Top 10 in the U.S. and achieving the highest market share for Burberry in the UK. In addition, Coty expanded its presence both online and offline across its three prestigious cosmetics brands, despite facing periodic lockdowns in China, which impacted sales. Concurrently, Coty reported impressive growth in its Lancaster skincare brand, achieving over 20% growth compared to the same period last year, ahead of key brand initiatives set for the second half of FY23.

Coty’s Consumer Beauty division also delivered outstanding results in Q1, fueled by sustained market share growth and robust operational activities. The Consumer Beauty revenues increased by 5% on a reported basis and soared by 12% on an LFL basis. Revenue growth in both cosmetics and mass fragrances aligned with or exceeded sell-out performance, significantly boosted by an impressive product launch pipeline and strategic brand initiatives within the bodycare sector. This includes the premium and sustainable bodycare line from adidas, Monange’s silicone-free deodorant, and Bozzano’s clinical range. Throughout the quarter, the global mass beauty category grew steadily, while Coty outperformed the market, achieving 10 consecutive months of market share gains².

From a geographic standpoint, revenues grew across all regions on a constant currency basis. In the EMEA region, sales saw a reported decline of 3%, yet experienced an LFL growth of 11%, driven primarily by strong momentum in Travel Retail and double-digit growth in most markets. The Americas region showcased robust performance in Brazil and Latin America, while strong U.S. demand persisted even amidst supply constraints. In the Asia Pacific region, reported sales grew by 6% and LFL by 12%, with notable growth in Asia excluding China and Travel Retail, while revenues in China returned to year-over-year growth.

In spite of the challenging inflationary landscape and an increased contribution from the lower gross margin bodycare segment, Coty managed to achieve solid gross margin expansion in the quarter. The reported gross margin increased by 70 basis points year-over-year to 63.9%, while the adjusted gross margin also grew by 70 basis points to 64.1%, even as inflationary pressures hovered around 2% of revenues in Q1. This impressive gross margin growth was attributed to favorable pricing strategies as well as improvements in trade spending. Coty reported an operating income of $171.9 million for Q1, marking a tenfold increase compared to the same period last year, while the adjusted operating income reached $249.6 million, reflecting a strong 24% growth year-over-year. The adjusted EBITDA for the quarter also increased by 11% year-over-year to $307.9 million.

During Q1, Coty generated robust free cash flow amounting to $88.2 million, which contributed to a reduction in Financial Net Debt to $4.2 billion by the end of the quarter. Consequently, the financial leverage ratio improved sequentially from 4.7x at the end of the previous quarter to below 4.5x exiting Q1, positioning Coty firmly on its trajectory to achieve a leverage target of 4x by the end of CY22. The value of Coty’s retained 26% stake in Wella surged to approximately $1.0 billion at the quarter’s close, reflecting Wella’s recent acquisition of a high-growth haircare brand. This development supported Coty’s Economic Net Debt, which stood at approximately $3.2 billion.

Commenting on the operational outcomes, CEO Sue Y. Nabi remarked:

“Our outstanding Q1 results, achieved amid a challenging external environment marked by persistent component shortages, reaffirm the strength and resilience of Coty’s brands, teams, strategy, and operating model. This marks the ninth consecutive quarter that Coty has delivered results in line with or exceeding expectations. We continue to witness significant progress across all key financial KPIs, from sales and gross margins to adjusted EBITDA and our deleveraging initiatives.

While we have certainly benefited from a resilient beauty category, I am particularly pleased that our balanced growth strategy is in full effect. We have achieved robust growth across all our regions, across key categories including fragrances, cosmetics, skincare, and bodycare, as well as across both divisions. This success has enabled us to report sales growth significantly above the underlying beauty market and among the top performers in our competitive set.

Our strong topline performance and gross margin expansion have allowed us to sustain our investments in working media, and we remain committed to continuing this path, particularly during the critical Q2 holiday season. While foreign exchange fluctuations have naturally impacted our reported sales, I am optimistic that our closely aligned regional sales mix and cost mix will safeguard our profit outcomes.

Furthermore, we have diligently executed our strategic pillars. In Consumer Beauty, we have sustained momentum, marking ten consecutive months of share gains.

Our Prestige fragrance division has also continued to deliver exceptional results, despite facing tough year-over-year comparisons in Q1. We are witnessing a full-scale “fragrance index” effect as consumers increasingly turn to fragrances as mood-enhancing and affordable luxuries in uncertain times.

In Prestige cosmetics, we are expanding our presence across our three brands: Burberry, Gucci, and Kylie Cosmetics, further solidifying our footprint.

As we shared in September, expanding our Skincare division is a strategic focus for us in the coming years. Encouragingly, Lancaster has emerged as a critical pillar in this growth strategy, with sales increasing by over 20% compared to the previous year.

In the digital realm, our multi-faceted strategy continues to elevate Coty’s profile, whether through viral social commerce successes surrounding the Marc Jacobs Daisy Ever So Fresh launch, exclusive digital-first partnerships between Max Factor and Chinese fashion label Labelhood, or global success during Amazon Prime Week.

In China, our business has returned to LFL growth despite ongoing intermittent lockdowns. Our perspective on the structural attractiveness of the Chinese beauty market remains unchanged for the coming years, particularly regarding premium offerings.

Lastly, on our sixth strategic pillar of achieving leadership in sustainability, I am delighted that Coty’s ongoing advancements in its ESG transformation, disclosures, and policy frameworks have been recognized by Sustainalytics. This esteemed rating agency recently elevated our ESG rating, placing Coty in the top quartile of personal products companies. Our transformation journey is far from over, and we are excited to share updates soon regarding our environmental initiatives, alongside our recent announcement of Coty’s market-leading gender-neutral global parental leave policy. We are thrilled with Coty’s progress thus far and look forward to the road ahead.”

Business Wire 2022

*Adjusted financial metrics used in this release are non-GAAP. See reconciliations of GAAP results to Adjusted results in the accompanying tables.

1 Prestige sell-out based on sell-out data covering over 70% of the Company’s Prestige sales base

2 Consumer Beauty global market share data available through August 2022

Key Highlights from Q1 2023

• In Q1 2023, net revenues experienced robust like-for-like growth in both Prestige and Consumer Beauty segments, with sell-out growth in Prestige in the low double digits and sell-out growth in Consumer Beauty in the mid-to-high single digits.
• Reported operating income reached $171.9 million in Q1 2023.
• The adjusted operating income for Q1 2023 rose by 24% to $249.6 million, achieving a margin of 18.0%, reflecting significant margin expansion of 340 basis points.
• The adjusted EBITDA for Q1 2023 increased by 11% to $307.9 million, with a margin of 22.2%, indicating strong margin expansion of 190 basis points.
• The reported earnings per share (EPS) was $0.15, with adjusted EPS of $0.11, improving from $0.08 last year despite a $0.04 negative impact on EPS from the mark-to-market on the equity swap.
• Coty achieved savings exceeding $20 million in Q1, with a clear roadmap targeting approximately $170 million in savings for FY23.
• The free cash flow for Q1 2023 stood solid at $88.2 million.
• Financial Net Debt amounted to $4.2 billion, while Economic Net Debt totaled $3.2 billion at the end of the quarter, with Coty firmly on track to achieve financial leverage of approximately 4x by the end of CY22.

Future Outlook

Coty foresees strong demand growth in nearly all markets, particularly in Prestige fragrances, while maintaining vigorous launch activity in both Prestige and Consumer Beauty segments. This robust demand is concurrently contributing to component shortages, which represent the primary limitation for near-term growth. The Company remains confident in its FY23 outlook, aligning with its medium-term growth algorithm.

Coty continues to target FY23 adjusted EBITDA of $955-965 million based on current foreign exchange rates, which is consistent with its medium-term growth target of +9-11%, adjusting for the impacts of exiting the Russia market.

The Company anticipates FY23 adjusted EPS growth in the mid-teens to $0.32-0.33, excluding any mark-to-market adjustments on the equity swap and assuming no significant changes in current tax regulations. Coty expects accelerated adjusted EPS growth in FY24 and beyond, driven by lower interest expenses as part of its deleveraging strategy, consistent with its medium-term targets.

Coty expects FY23 revenues for its core business, adjusted for the impacts of exiting Russia, to grow by 6-8%. The exit from Russia is estimated to negatively affect FY23 sales by approximately 2%. Additionally, based on current exchange rates, Coty anticipates foreign exchange headwinds impacting FY23 revenues by 6-8%.

With solid Q1 results, Coty expects the first half of FY23 core business LFL revenue growth trends to align with its annual growth target of +6-8%, with robust demand anticipated in Q2 and component constraints being the primary growth limitation. Q2 sales results will reflect the impact from exiting the Russia business, estimated at approximately 3% of revenues, alongside an estimated foreign exchange headwind on sales of 7-9% at current rates, with a more moderate effect on profits.

Coty anticipates modest gross margin expansion in both Q2 and FY23, despite the elevated inflationary environment.

Furthermore, the Company continues to target leverage towards 4x by the end of CY22, based on CY22 adjusted EBITDA approaching $950 million, and expects leverage of approximately 3x by the end of CY23 and 2x by the end of CY25.

Financial Overview

Refer to “Non-GAAP Financial Measures” for a discussion of the non-GAAP financial measures utilized in this release; reconciliations from reported to adjusted results can be found at the end of this release.

Revenues:

• In Q1 2023, reported net revenues reached $1,390.0 million, reflecting a 1% increase year-over-year, including a negative foreign exchange impact of 7%. The LFL revenue increased by 9%, driven by a 7% increase in Prestige and a 12% increase in Consumer Beauty. The exit from Russia represented a ~2% headwind to total Coty LFL, a ~3% headwind to Prestige LFL, and a negligible impact on Consumer Beauty.

Gross Margin:

• In Q1 2023, the reported gross margin was 63.9%, up from 63.2% in the prior-year period, while the adjusted gross margin of 64.1% increased from 63.4% in Q1 2022. The margin increase was driven by pricing and improved trade spending, partially offset by COGS inflation.

Operating Income and EBITDA:

• The reported operating income for Q1 2023 was $171.9 million, up from $17.2 million in the prior year due to a $77.1 million reduction in stock-based compensation, higher gross profit, and a $15.9 million reduction in restructuring and other business realignment costs.
• The adjusted operating income for Q1 2023 rose by 24% to $249.6 million, driven by higher sales and gross profit, with an adjusted EBITDA of $307.9 million, reflecting an 11% increase from the prior year. For Q1 2023, the adjusted operating margin was 18.0%, a substantial increase of 340 basis points year-over-year, while the adjusted EBITDA margin was 22.2%, marking an increase of 190 basis points year-over-year.

Net Income:

• In Q1 2023, reported net income was $125.3 million, up from $103.0 million in the previous year, attributed to the increase in reported operating income and a decrease in the tax provision, partially offset by a higher benefit in the prior year from changes in Wella’s fair value.
• The adjusted net income for Q1 2023 was $92.7 million, rising from $63.1 million in the prior year, as the increase in adjusted operating income was partially offset by a $38 million negative impact from the mark-to-market on the equity swap, reflecting a lower Coty share price at the end of Q1 compared to the beginning of the quarter.

Earnings Per Share (EPS) – diluted:

• In Q1 2023, the reported diluted earnings per share was $0.15, an increase from $0.13 in the prior year due to the growth in reported net income.
• The adjusted diluted EPS for Q1 2023 was $0.11, improving from $0.08 in the prior year due to the increase in adjusted net income, despite a $0.04 headwind from the mark-to-market on the equity swap.

Operating Cash Flow:

• For Q1 2023, cash flows from operations totaled $163.2 million, down from $285.7 million in the prior-year period, reflecting higher working capital outflows, partially offset by an increase in net income on a cash basis.

• The free cash flow for Q1 2023 was solid at $88.2 million, a decline from $240.7 million in the previous year primarily driven by a $122.5 million decrease in operating cash flow and a $30 million increase in capital expenditures timing.

Financial Net Debt:

• As of September 30, 2022, the Financial Net Debt was $4,191.4 million, a decrease from $4,265.2 million on June 30, 2022, driven by free cash flow generation.

First Quarter Business Review by Segment

Prestige Sales Performance
In Q1 2023, Prestige net revenues reached $863.4 million, accounting for 62% of Coty’s total sales, reflecting a 1% decrease on a reported basis compared to the prior year. However, on a like-for-like basis, Prestige net revenues exhibited robust growth of 7%, despite a 300 basis point impact from the Russia exit, propelled by strong performance across all regions, particularly in the recovering EMEA markets, Travel Retail, and Latin America.

During Q1, the Prestige fragrance sector across North America and Europe continued to experience strong growth, with high single-digit increases year-over-year and over 20% increases compared to 2019 levels, particularly in the U.S., Canada, and Italy. The global Travel Retail sector also sustained strong double-digit growth, driven by recovering travel and a surge in beauty consumption. Coty’s strong performance was further bolstered by notable results from top brands including Calvin Klein, Hugo Boss, Gucci Beauty, Burberry, and Chloe. Promising innovations like Gucci Flora Gorgeous Jasmine and Marc Jacobs Daisy Ever So Fresh achieved exceptional sell-out figures during the quarter. However, Prestige cosmetics consumption faced challenges due to intermittent lockdowns in China, leading to a low double-digit growth in overall Prestige sell-out, which outpaced the high single-digit LFL revenue growth impacted by the Russia exit and industry-wide component constraints in fragrances.

The Prestige segment generated a reported operating income of $170.3 million in Q1 2023, an increase from $132.1 million in the prior year. The adjusted operating income for Q1 2023 was $207.3 million, up from $177.0 million in the previous year, driven by substantial gross margin improvements. The adjusted EBITDA for the Prestige segment rose to $234.9 million from $215.0 million in the prior year, with a margin of 27.2%, marking a 250 basis point increase year-over-year.

Consumer Beauty Sales Performance
In Q1 2023, Consumer Beauty net revenues reached $526.6 million, representing 38% of Coty’s total sales, reflecting a 5% increase on a reported basis compared to the previous year. On a like-for-like basis, Consumer Beauty net revenues soared by 12%, showcasing strong performance across color cosmetics, mass fragrances, body care, and skincare categories. Notably, all regions reported like-for-like growth during the quarter.

Throughout Q1, the entire Coty Consumer Beauty business continued to gain global market share for ten consecutive months, driven by momentum in brands such as Rimmel, Max Factor, Monange, and Bruno Banani. While revenue growth in cosmetics and mass fragrances remained broadly in line with or exceeded sell-out performance, the division was significantly bolstered by a robust launch pipeline and strategic brand initiatives within its body care sector, including the premium and sustainable body care line from adidas, Monange’s silicone-free deodorant, and Bozzano’s clinical range.

Reported operating income for the Consumer Beauty division was $32.0 million in

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