Coty Inc. Q2 FY2026 Earnings Call

Good morning, and good afternoon, everyone. My name is Chloe, and I will be your conference operator today. At this time, I would like to welcome everyone to Coty's Second Quarter Fiscal 2026 Question-and-Answer Conference Call. As a reminder, this conference call is being recorded today, February 6, 2026, at 8:00 a.m. Eastern Time or 2:00 p.m. Central European Time. Please note that on February 5, at approximately 4:30 p.m. Eastern Time or 10:30 p.m. Central European Time, Coty issued a press release and prepared remarks webcast, which can be found on its Investor Relations website. On today's call are Markus Strobel, Executive Chairman of the Board and Interim Chief Executive Officer; and Laurent Mercier, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, except where noted, the discussion of Coty's financial results and Coty's expectations reflect certain adjustments as specified in the non-GAAP Financial Measures section of the company's release. With that, we will now open the line for questions. We will now take our first question from Filippo Falorni with Citi.

Markus, maybe can you give us a bit more color on the Color the Future performance improvement plan for Consumer Beauty. You mentioned in the prepared remarks yesterday that there's a lot of different initiatives commercially, including streamlining the portfolio. What are you thinking those potential impacts are going to be on sales near term and then a little bit longer term? And then, Laurent, on the margin side, Consumer Beauty has been significantly below corporate average. Do you have an aspiration of what their business operating margins can get back to?

Thanks, Filippo. I'll take that one. We have about three or four key principles guiding how we are addressing our consumer business priorities and focusing on our business development plan. It's crucial for us to return to sell-out growth and increase our market share. We need to take charge of our future and succeed in the market. That's our goal. Firstly, we will focus on our most iconic brands, such as CoverGirl, especially products like Lash Blast and Simply Ageless, as well as Rimmel. We've started this focus in the past few weeks, and I'm encouraged by our early results. We've seen declines in these brands in the high single digits, but this has improved to the low and mid-single digits. While it's not ideal and we are not satisfied, we are optimistic about the impact of concentrating on our key assets. Secondly, the cosmetics sector is heavily influenced by significant innovation launches in the spring. Previously, we had large innovation bundles with many SKUs, but many did not perform well and filled the shelves with unproductive items. This led to challenges and returns from retailers. To address this, we will introduce our first bundle in fiscal '26, which will be more focused, streamlined, and include better performing SKUs, ensuring we maintain our existing fast-moving items on the shelves. Regarding your question about sell-out timing, with smaller bundles initially, we will see less pipeline fill, and you will observe this in Q3. However, the enhanced focus and increased sell-out velocity on the shelf will lead to improved sell-out over time, helping us regain our business momentum. Third, in previous large bundles and advertising campaigns, we allocated significant funds to asset creation, leaving little for what we call working ACP, which engages consumers through digital media and influencer advocacy. By shifting to sharper, smaller bundles, we can redirect funds from asset creation into working media. Additionally, we have conducted exciting experiments using AI in color cosmetics, allowing us to create assets at a significantly reduced cost, potentially by 70% to 80% compared to current methods. This gives us more resources to invest back into consumer-facing initiatives. These three strategies combined will enhance our performance beyond Q3, which is a pivotal moment for us, and help improve our future in color cosmetics.

Yes. Maybe, Filippo, to take your second question on the profitability for Consumer Beauty. I mean you heard really from Markus that, number one, there is a clear diagnosis on where we have the gaps and the work that Gordon and the team initiated that in front of each gap, okay, there is a clear action plan. So now, of course, it takes some time really to implement these actions. Markus was giving the example of innovation. So the team really has designed a detailed innovation plan, but this is going to pay off in fiscal '27, okay? But on top of this is, of course, reignite the sellout and then volumes will also reverse the gross margin trend because currently in the gap, there is some fixed cost under absorption. So we have really these elements. A lot of work done really on platforming across all our great brands. A&CP, detailed work, really how to optimize A&CP. And of course, there is another work on SG&A optimization. So I'm not going to give you a precise number, but I can tell you that all these initiatives really under high scrutiny, and you will start to see some improvement in fiscal '27, which will be part of the profit recovery for the global company.

We'll take our next question from Rob Ottenstein with Evercore.

Great. Just to kind of understand things a little bit better, I want to just sort of throw out a friendly challenge, which I'm sure it will be easy for you to rebuke, but it'll, I think, help understand things a little bit better. Based on the management comments from what I understood, there's a problem with focus, brand SKU proliferation. You want to get the portfolio right, so you can really focus on the key brands and all of that makes sense. But this is also happening within the context of very significant changes in where and how the consumer buys. Drug stores where you're pretty heavily exposed have been very weak. Department stores have been weak for many years. Amazon has become a huge driver. So I was wondering if you could just kind of talk about your strategy within the context of these very important route-to-market changes and how the consumer shops and why you feel it's more important to get rid of SKUs first rather than get the RTM footprint right first and how you're balancing those 2?

Yes, I don’t see this as a contradiction. Our primary focus is to drive sellout and market share since we have underperformed the market over the past 18 months, which is not sustainable. We need to grow at least in line with the market and ideally slightly above it. This is our goal. Concentrating on SKUs makes a significant difference in performance, and we are also addressing the channel footprint. We are performing well in our Prestige portfolio on Amazon, with sales increasing by around 30% in the last six months. We introduced the Marc Jacobs brand on Amazon in July, which is experiencing double-digit growth. Notably, our Amazon launch is having a positive impact on brick-and-mortar sales. We are observing a similar trend with our Rimmel brand on TikTok Shop in the U.K., where we are actively engaging. While volumes are still small, the marketing impact and gains in algorithm rankings are positively affecting other channels. We are investing in new channels but must ensure that we also succeed in existing channels since our consumers shop across both. When I refer to less being more to build the core, it applies not only to our product portfolio but also to our channels. We need new channels to thrive and create a halo effect that enhances our core in existing channels. This is where the real potential lies.

Great. And are you making any changes in terms of channel strategy?

We're going to invest, obviously, in our business, we're going to go where the consumer goes, okay? So we're investing heavily in online. We're investing heavily in e-commerce. We're investing in TikTok shops and everywhere where consumers go. But it's, for us, also important that we, especially in our cosmetics business, protect the channels where our existing consumer shops as well. As we get new consumers, that's great. But brands like CoverGirl and Sally Hansen, there's a huge Gen X population that shops for them. And actually, we have retailers asking us, everybody is going after Gen Z, who's doing something for Gen X and you can do that because you have the brands to do it, at least help us. So I think with the right joint business planning activities with the drugstores and these customers, we can do a big splash in the market on both groups.

We'll move next to Nik Modi with RBC Capital Markets.

So I guess just Markus, any views on kind of how you intend to manage the business after the Gucci license ends? And would you consider a deal with Kering to kind of terminate early just so you can kind of move on and reallocate resources? That's my first question. And then I have just a quick bigger picture strategic question.

Okay. Let me get to your first one, Nik. I mean, how we're addressing this, and I think we have mentioned this in previous calls. I mean, job #1 for us is to drive our big brand franchises. And we have many big brand franchises that are basically over $0.5 billion, like Hugo Boss, Burberry to the next level. They have still a huge growth potential. Marc Jacobs has huge growth potential. Chloe has huge growth potential. So basically, these brands that we have, where we see the potential, where we bring out new. So we are basically pretty busy cooking new initiatives and new innovation for the years '27, '28, '29 that coincide with the Gucci exit in June '28, I think it is, to really have the right pipeline to build our top line sales and compensate part of this. Second job to be done is building the new brands that we have acquired. We have new licenses with Swarovski, Armani, Etro. And we have big plans for Swarovski. We're going to come up with what we hope to be a real blockbuster in 2027. And number three, obviously, on Gucci, as we get closer to the license exit, we probably also need to look into our cost structure, how we kind of tweak this a bit to keep our profitability intact. So these are the 3 actions we're taking there. Now your question on Kering. I mean we are always open for deals for shareholders. So yes, we are open.

Got it. This relates to Filippo's question about the Consumer Beauty business. Newness is very important in fragrances. How does that align with the idea of streamlining the complexity of the portfolio?

Yes, not necessarily. It's important to define what newness means in fine fragrances. People enjoy experimenting and layering scents, so it's natural to develop new offerings. However, these new products must be designed to support the overall brand and portfolio. For instance, we launched Boss Bottled Beyond in the summer, which has been quite successful, ranking as the second top male initiative of the year. We've already captured a 90 basis point market share in the U.S. because we aimed to penetrate that market with this initiative, and it's performing well. The challenge is that the overall Hugo Boss franchise is not experiencing growth. While innovation is beneficial, it doesn't positively influence the core offerings. Often, when a new innovation is introduced, it involves many SKUs that may attract attention, but we end up losing shelf space for established SKUs that consumers love and that sell quickly. We need to avoid this in the future and be more strategic about how we introduce innovations and create a halo effect. When launching a new product, it should enhance the overall Hugo Boss franchise rather than only the new product. We are committed to applying this disciplined approach to ensure that our innovations have a positive impact on our core products, which we believe will yield strong results going forward.

We'll move next to Olivia Tong with Raymond James.

Nice to speak with you, Markus and Laurent. Markus, I was wondering if you could give some views on your assessment of the internal controls of the company and sort of prioritization, what's your starting point? Because is it the brand, the marketing, innovation, SKU management, IT, it sounds like it's all of the above. So do you think this is a company in need of significant reinvestment? Are there costs that you can take out? And I guess, most importantly, do you trust the answers that the analytics are providing?

Thank you, Olivia, for your question. First of all, we have an incredibly creative organization with talented individuals who come up with amazing ideas that even I, with my extensive experience, find impressive. However, what we lack is the operational discipline to effectively bring these innovations to market in a well-sequenced and adequately funded manner, ensuring that our agreements align with our market plans. We often get so excited about our innovations that we focus on the initial sell-in, which may work well for a quarter or two, but our primary focus needs to shift to the sell-out. We must consider how these products reach consumers and whether they meet their needs. It's essential that we establish strong joint business plans with every single retailer to drive sell-out, as increased sell-out will naturally boost sell-in. The key is to start from the consumer perspective, focusing on consumption and market share. This represents a significant shift for us. It's easy to articulate but challenging to implement, as changing the organization's mindset requires solid processes, data, and analytics. We are currently dedicating a lot of time to achieving a unified source of truth for our business operations. When we talk about customer service, we need to identify a single metric that tells us whether we are fulfilling customer service expectations and meeting market share goals. We're investing heavily in data and AI to enhance our data capabilities, ensuring that we ask the right questions and develop effective actions. You're right; substantial investment is necessary in this area, and we are committed to making those investments.

We'll take our next question from Charles Scotti with Kepler.

I have a couple of questions. First, could you provide more details on the anticipated mid-single-digit sales decline in Q3? It seems that Consumer Beauty will continue to be a major issue, but the comparisons for Prestige Beauty will get significantly easier in Q3, and inventories appear to be in better shape. Despite this, it looks like there could be a further decline in Q3. What is causing this situation? More generally, what is leading to the discrepancy between consumer expectations and your anticipated top line growth? Is it due to destocking or losses in market share? My second question is about the gross... but let's address one question at a time.

Yes, I can start with that, Charles, and then you can continue. In Q3, we are experiencing a mid-single-digit decline primarily due to challenges in Consumer Beauty. We are aware of the gaps and the team is actively implementing strategies to address them, but it takes time. There have been numerous innovations which have led to some returns, negatively impacting our top line, and we are managing that situation. Additionally, we are prioritizing key areas and deprioritizing others, which also affects our net revenue, but this is part of a strategy aimed at improving gross margins and profitability over time. In Q3, there are considerations regarding Consumer Beauty. However, we are starting to see positive signs with brands like CoverGirl, Simply Ageless, and Lash Blast performing well, and we need to focus on amplifying these efforts, though they require time to develop. Regarding Prestige, we've seen a sequential recovery from Q1 to Q2, and the inventory issues we faced over the past year are beginning to resolve. Our sell-in and sell-out processes are starting to align, which is a positive development. That said, we still have some challenges in Q3, focusing on sell-out, which will influence sell-in. Specifically, U.S. Prestige had a disappointing Q2 despite a promising start. This decline is related to factors Markus mentioned, where we launched great innovations but didn't maintain focus on our core products. This has affected our sellout and market share, and while we are taking corrective actions, it will take time and is impacting our Q3 Prestige top line. Overall, these are adjustments we're making, and we expect to see a gradual recovery in both divisions.

Okay. Very clear. On the 200 and 300 bps gross margin contraction, could you break down the key drivers between input cost inflation, product geographic mix, tariff and promotions? And what is your full year gross margin assumption? Given that the margin comps also become much easier in Q4, is it fair to assume the same 200 to 300 bps margin contraction in Q4 or a little bit less?

Thank you. Indeed, the gross margin for Q2 was lower than we initially anticipated, which is impacting our profits. The main issues are as follows: In the Prestige division, we observed significant promotions in the market towards the end of Q2, affecting trade terms and markdown levels. This trend was evident across the entire category and sector, leading to a setback in gross margin, particularly in Prestige. Additionally, tariff expenses amounting to approximately $8 million for Q2, expected to be under $40 million for the full year, are also a factor. Foreign exchange rates, particularly the euro to dollar, are creating difficulties on our gross margin, especially since we have increased production in the U.S. while still maintaining significant production in Europe. However, it's important to note that the gross margin in Prestige remains higher than it was two years ago. Despite these challenges, we predict a similar trend for Q3, with potential recovery in Q4. For Consumer Beauty, the challenges are similar, but lower volumes in our color cosmetic brand have led to fixed cost under absorption, adversely affecting our gross margin. A gradual recovery in sellout for our major brands will help alleviate this issue. Furthermore, while we are performing well in Brazil, our highly profitable brands in the U.S. are facing pressures, contributing to a mechanical mix effect. Our plan is to recover from this situation step by step, expecting a similar pattern in Q3 and a sequential recovery in Q4, continuing into fiscal '27.

We'll move next to Oliver Chen with TD Cowen.

On the Consumer Beauty side, should we anticipate that the situation will worsen before it improves due to the necessary reset? Additionally, which specific innovation in Consumer Beauty do you feel most confident about and think we should prioritize? Regarding the Prestige fragrance sector, what are your insights on your growth compared to the market, and what innovations are you concentrating on to exceed market trends?

Yes. The first question was again, I forget... The Consumer Beauty segment is undergoing significant changes as we adjust our market strategy with sharper bundles and a stronger focus on our core business. While this quarter is challenging, I believe that things will improve over time. I'm confident in our plans and the team's efforts to connect with both modern consumers and our loyal customer base. We're excited about the upcoming innovations, particularly with our core franchises like Simply Ageless and Lash Blast, as well as new trend items like skin tints that are in demand. Our fiscal '26 bundle will be a considerable improvement, and we anticipate an even better fiscal '27 bundle. In the Prestige category, we have some exciting blockbusters set to launch soon, including a major female initiative from Calvin Klein that we hope will enhance the overall franchise. If we can achieve growth there, it can significantly impact our sales. We're also preparing for a substantial Marc Jacobs beauty makeup launch at the end of the fiscal year and are optimistic about its potential as a blockbuster. Our immediate focus is on these two initiatives, and there is much more in the works that we can discuss in future conversations.

We'll move next to Susan Anderson with Canaccord Genuity.

I guess maybe just a follow-up on the promotional environment. I guess, as things kind of worsened in second quarter in the back half, was this driven by competitors, I guess, trying to gain more share? Or was it just consumer demand was lackluster? And then do you expect this promotional environment and markdowns to continue into the third quarter? And then just a follow-up on Oliver's question as well. Maybe if you could talk about kind of where your Prestige fragrances are growing relative to the market.

Yes, I can start. We observed that some competitors became very aggressive with their promotions, which is why I mentioned this trend emerged more in the second half of Q2. We anticipate that this will continue into Q3, and that’s why we are factoring it into our gross margin equation. This situation is actually encouraging us to reallocate our resources and focus more on sellout. We have exciting innovations to promote. Overall, we see Gen Z entering the category with enthusiasm, and volumes are increasing, which is crucial. We view this as a conjectural impact, but we are confident that our efforts will help us manage these challenges effectively. From a consumer perspective, we have strong confidence based on key performance indicators, including household penetration in markets like the U.S. and the influx of new consumers into the category. We are also leveraging new platforms like TikTok where we are witnessing significant engagement. We are confident that the fragrance category will continue to grow in the mid-single digits, and both volume and mix are critical, with volume being especially important.

We'll take our last question from Andrea Teixeira with JPMorgan.

I would like to ask you, Markus, to share your experience managing these brands, particularly the Consumer Beauty portfolio at P&G, and some of the fragrances at the time when the decision was made to sell them to Coty. Many of us are curious about what has changed with Coty since then. The industry has evolved significantly, and Coty has taken care of these brands. What makes Coty more capable of succeeding now? Additionally, could you clarify the impact of SKU rationalization on the top line and gross margin over the years, and how we should view the timing of that impact?

I can't comment on what happened ten years ago when I was managing the SK-II brand in Asia. Instead, I can share what we're currently doing in the business that gives me confidence. If you look at CoverGirl's history over the past few years, there has been a lot of inconsistency in its positioning, trying to appeal to older consumers and then shifting focus to Gen Z, which clearly didn’t succeed. I believe that every brand I have managed always starts with understanding the consumer. Do I know who my consumer is? Do I understand my target market? Am I offering the right propositions? And do I have a solid brand equity to work with that I will not abandon? Recently, under Gordon's leadership, we've focused on refining our brand equities and clearly defining our target audience for CoverGirl. We want to identify who will love Rimmel as well. We've discovered that there are potential consumers across different age groups for both brands, and now it's time to bring those insights to life. We are transitioning from strategy to execution in the market, and we expect significant progress over the next few weeks and months. I am optimistic that we can improve our performance compared to before. Now, regarding the gross margin...

Yes, Andrea, your question was about how we expect to see improvement from our actions. As I mentioned earlier, we are aware of the challenges affecting our gross margin. Some of these challenges will naturally resolve over time. The tariffs and foreign exchange issues are affecting us this year, but they should stabilize next year. In the Consumer Beauty segment, you have heard that our initiatives will lead to improved gross margins. The SKU rationalization, both in Consumer Beauty and Prestige, will also impact the entire value chain. Markus, you can add your thoughts on this.

Yes. I think one, Andrea, I think which is very important on that we're doing a lot in terms of becoming more productive and saving costs, improving our gross margin. But in the beauty care category, with the gross margins you have in general in Beauty, the #1 thing is to drive top line growth because I'm always saying top line health is bottom line wealth in beauty, and that's what we all geared to do.

At this time, we've reached our allotted time for questions. I'll now turn the call back over to Markus Strobel for any additional or closing remarks.

All right. Thanks for the call. We recognize that our recent financial performance has not met expectations. There's no sugar coating it. This leadership transition marks a fresh chapter grounded in realism, discipline and focus. Going forward, we will be transparent about what works and what does not. We're going to set balanced near- and long-term targets. We're going to concentrate our resources where they matter most, and we continuously review our portfolio to unlock value. Consumer demand is our North Star, and we have a clear emphasis on focused execution, sharper priorities. I'm confident that Coty will improve. It will take time, but progress is already underway. As I said in my prepared remarks, it will not happen overnight, but it will happen.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.