Earnings Call Transcript - COTY Q3 2025

Operator, Operator

My name is Chelsea, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Third Quarter Fiscal 2025 Question and Answer Conference Call. As a reminder, this conference call is being recorded today, May 07, 2025, at 08:00 a.m. Eastern Time or 02:00 p.m. Central European Time. Please note that on May 6 at approximately 04:30 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 Sue Nabi, 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. And we'll take our first question from Rob Ottenstein with Evercore. Please go ahead.

Rob Ottenstein, Analyst

Great. Thank you very much. Sue, I was wondering if you could give us a little bit more detail on the Q4 sales outlook. Is it a reflection of weakening consumer demand or changes in kind of retail inventories or actions that you're doing just to kind of better understand why you expect to see that sales, sharp sales deceleration in Q4, please? Thank you.

Sue Nabi, CEO

Hello. Good morning, Robert. Good morning, everyone. So, it has not to do with, I would say, worsening of the market conditions, not at all. This has to do a lot with our wish on the Prestige division, while the Fragrance category continues to grow solidly to clean up the baseline. At the same time, we are still seeing pressure coming on the Prestige cosmetics market, mainly coming from Asia, travel retail, and from China, which are still under pressure. So, this is really in the Prestige division about intervening actively to clean up the baseline, given how big the pipeline of innovation will be for fiscal '26. We wanted to play the role of stimulating the demand and coming back to growth as big as possible, and for this, you need a clean baseline. For the Consumer Beauty division, we see a continuation of the mid-single-digits decline in the Cosmetics category globally. We also see some impact on our Cosmetics sales from the marketing allocation and some headwinds in growth-to-net, which should reverse next year. So, in summary, I would say that this figure is, if we didn't go to that cleaning, this minor, the high-single-digits decline would become rather a low single-digit decline without the cleanup. So, that's the way I would describe it. Still the same trends, strong dynamics behind fragrances, including in the U.S., but still amid a single-digit decline in Color Cosmetics, while our brands are continuing to fight for market share in both divisions.

Operator, Operator

Thank you. Our next question will come from Filippo Falorni with Citi. Please go ahead.

Filippo Falorni, Analyst

Hey, good morning, everyone. So, maybe just following up on Rob's question. Just on the Prestige fragrance category, you mentioned it still grew at a mid-single-digit rate if you adjust for the Easter timing, low single-digit on a reported basis. Can you give us a sense of just geographically how you're seeing the growth of the category, especially exiting the quarter, if you think this mid-single-digit is sustainable going forward? Thank you.

Sue Nabi, CEO

Yes. Good morning, Filippo. So, we believe this mid-single-digit percentage growth is sustainable, specifically in the U.S. It's also strong in most European markets, and the reason why we believe this will continue is that this famous fragrance index that we've been referring to for almost three years is continuing in a way to play with the steel, and this is what we envision for the next years—the continued gains in penetration in a country like the U.S., where penetration is still much lower, driven by a new generation of users. It used to be Gen Zs, male consumers, Hispanic consumers. This continues to a lesser extent, but now it's around male teens and still the continuation of Gen Z trending towards niche fragrances. So, we believe this growth engine for this category will continue in the U.S. In Europe, growth will likely be driven by a mix of pricing, and in China, we see the market starting to get a little better quarter-after-quarter, but there again, the penetration level is so low that we believe the volumes coming from more and more users will continue to drive the growth of this market. Overall, the market remains strong in most European markets. It continues to be mid-single-digits in the U.S. and is still affected in China, but we believe the global growth of the category of fragrances, both in Prestige and in mass, will continue to be the strongest among the three key categories of the beauty business.

Operator, Operator

Thank you. Our next question will come from Susan Anderson with Canaccord Genuity. Please go ahead.

Susan Anderson, Analyst

Hi, good morning. Thanks for taking my question. I wanted to ask about the Consumer Beauty business. I think in your prepared comments, you talked about rebalancing your resources to profit. Not sure if you meant just within Consumer Beauty or the whole portfolio, but just curious how you're thinking about CoverGirl, and if potentially, you could sell that at some point or do you want to refocus your efforts here towards profitability and then some more consumer innovations, I believe you mentioned? And then also, if you could just talk about the promotional environment in mass cosmetics, given it's been one of the weaker areas of beauty? And then, I was curious how some of the international brands like Rimmel perform versus CoverGirl? Thanks.

Sue Nabi, CEO

Thank you. So, if I understand what your question is, it's about how to increase the profitability of the Consumer Beauty division. So, the Consumer Beauty division has two stories, if I may say. There is Color Cosmetics on one side and then mass fragrances on the other side. The first information that needs to be known is that we are seeing really diverging trends. With Color Cosmetics under pressure, we know about the declines in this market both globally and in the U.S., but what we see is at the same time, mass fragrances are continuing to grow high-single-digits, sometimes double-digits growth, and this is really what we are trying to pivot now, since 1.5 years, which is reflected in the figures that you saw during the presentation. So, the Color Cosmetics category per se, when you look at the gross margin of this category at Coty, it's quite high in terms of gross margin. So, it really does not differ much versus our peers who are more exposed to skincare, hence higher profitability in this kind of mass market division. However, if you compare Color Cosmetics to Color Cosmetics, we are quite close to our competitors. The thing that happened is that when we started as a team in 2021 to reposition the division, we had to reinvest in building an innovation pipeline, increasing marketing spend, and strengthening brand reach, relevance, and equity, stabilizing the distribution, which led to investments that really weighed on operating margin for some time. Importantly, what we saw is that we had tangible results for this Color Cosmetics category. First, we achieved stabilized shelf space and probably the strongest brand equities in many years in this division. At the same time, the market has evolved, and we've seen the rise of indie or dupes, depending on how they are positioned, which, at the end of the day, did not grow the full market. As I mentioned last quarter, this Color Cosmetics market in the mass market needs to be a story of legacy, plus indie rather than just a story of indie alone, who are failing to grow the total market. Thus, on Color Cosmetics, we are making our efforts more granularly decisive, meaning that we've conducted a lot of studies to understand the levers that can support the brands with the highest return on investment. This approach is enabling us to free up some resources to allocate behind mass fragrances, which are much more profitable and have higher gross margins than Color Cosmetics. To finish, I can give you a good example of what we have done with Rimmel in the UK, which is a very interesting case study of the right playbook for success in this business. So, with Rimmel in the UK, we have implemented a combination of innovations that were inspired by Prestige, such as LEAP butter and the multitasker concealer, which went very strongly viral, aided by strong influencer content, organic consumer content, and advocacy activations using TikTok Shop for the first time. This led to a brand halo and a strong momentum on Amazon. Altogether, this required less investment than the classical launches we were doing before, but at the same time, they allowed us to stabilize the market share of the brand in the UK for the first time in three years. So, at the end of the day, we feel that we are finding the right recipe to support Color Cosmetics with a bit downsized investment, while achieving better results and investing behind the mass fragrance category. The second question revolves around the promotional environment. Laurent, would you like to take that one?

Laurent Mercier, CFO

Yes. So indeed, as we indicated, we are seeing some of our peers engaging in stronger promotions, and we are ensuring that in our portfolio we are protecting our brands against this approach. We are dedicating teams to work on strategic revenue management, focusing on the portfolio and working on the segmentation of the portfolio and innovations. So indeed, yes, there is this context, but again, back to the point Sue was making, we are making sure we protect the gross margin and maintain sufficient ammunition to support the brands.

Operator, Operator

Thank you. Our next question will come from Bonnie Herzog with Goldman Sachs. Please go ahead.

Bonnie Herzog, Analyst

Thank you. Hi, everyone. I actually had a question on FY '26 phasing. You called out gradual improvement in like-for-like trends over the course of the year, compared to expected weakness in F Q4. So, first, as you think about the gradual improvement, should we expect continued declines in 1H, especially maybe in Q1, before you return to growth later in the year? And then, second, how should we think about the timing of your new blockbuster launch that you mentioned in 1H? Could it add to growth in Q1? Or is this more about an F Q2 story? Thank you.

Laurent Mercier, CFO

Yes. Thank you. So, indeed, just to provide more details on the phasing. In the current uncertain macro environment, we want to be prudent around the outlook. Indeed, we currently anticipate some decline in sales in H1. However, we expect this trend to be better than Q4, gradually improving over the course of the year as we progress. The decline will largely be driven by Consumer Beauty, with the color cosmetic category remaining under pressure still in H1 fiscal '26, and while we are observing muted performance in Prestige, cosmetics and skincare are facing more headwinds, whereas Fragrance remains strong. Gradually, we can reconcile our sell-in and sell-out, supported by significant initiatives in Prestige Fragrance that Sue can comment on now.

Sue Nabi, CEO

Yes, Bonnie, good morning. To complement and to answer your question, for the first half of fiscal '26 and the full fiscal '26, we are back to the fiscal '23 and '24 recipe of success—implementing game-changing blockbusters, which I want to emphasize. It's probably going to be the best pipeline of innovations in the last five years. The new launch you referenced will indeed have an impact on Q1.

Operator, Operator

Thank you. Our next question will come from Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Korinne Wolfmeyer, Analyst

Hey, good morning, team. Thank you for taking the question. I'd like to touch a little bit on the tariff dynamic. You were able to quantify the impact, and it seems like it's going to be more of a fiscal '26 event. But can you give us a little bit more insight on the progress of offsetting that tariff impact throughout fiscal '26? Is it going to be immediate? Or will it be more of a gradual process throughout the year? And then, as we think about pricing coming in to help offset, which categories are going to see some of that pricing increase? And how are you thinking about the elasticity of that? Thank you.

Sue Nabi, CEO

Yes, absolutely. I mean, good morning. First of all, I want to emphasize that we are well-positioned in this context. Our geographical footprint, in terms of sales and manufacturing, is beneficial. For example, our color cosmetic factories for U.S. brands are located in the U.S., such as CoverGirl and Salient Scents, which provides us with significant protection. Regarding Prestige, most of our production is based in Europe, where we have a major factory in Barcelona, but we also have Prestige and Fragrance manufacturing in the U.S. We are well-protected until the end of fiscal '25 based on our earlier inventory builds before the tariffs were implemented. As stated, we see the impact being in the low $100 million, primarily driven by Prestige fragrance due to this sourcing in Europe as well as components and marketing materials sourced from China. We are actively working on changes in sourcing, and we have already started implementing a dual-sourcing approach, accelerating it in response to tariff developments. Additionally, we are implementing a mid-single-digit price increase on Prestige. We are careful to leverage strategic revenue management tools and meticulously analyze the elasticity of various segments to ensure we can maintain gross margins without negatively impacting volumes. We continue to monitor the situation closely as it evolves based on final decisions about tariffs.

Operator, Operator

Thank you. Our next question will come from Oliver Chen with TD Cowen. Please go ahead.

Oliver Chen, Analyst

Laurent, regarding retailer replenishment, what do you see happening over the next quarters and years? And what are the implications for how you're managing your own inventory? The second question relates to organizational changes in the U.S. that you mentioned. I would love your thoughts on how that will drive more agility and what’s happening. I believe regionalization versus centralization presents different opportunities for various reasons?

Laurent Mercier, CFO

Yes. Thank you, Oliver. Regarding retailer replenishment, indeed, we flagged this situation a few quarters ago. We are observing retailers being quite disciplined and tight with their cash management, applying strong inventory controls. We first noticed this in Consumer Beauty, Color Cosmetics, but we are now seeing it evident in the Prestige division as well. Retailers are moving from high inventory levels to very low inventory levels, particularly with the rise of e-commerce players like Amazon, who have become extremely organized around inventory management. Traditional retailers are tightening their approaches in response as well.

Sue Nabi, CEO

On the second part of your question, Oliver, we have been working on organizational changes in the U.S. for quite some time. Following our reorganization in 2021, we concentrated power in central organizations to rebuild marketing strategies, brand equities, and ensure alignment behind shared goals and culture. However, we now believe it's time to give more power to regional leaders as brand dynamics vary significantly by region. We've created a new English-speaking region encompassing the U.S., U.K., Canada, Australia, and New Zealand, led by a new leadership team able to balance local and global strategies, enabling more rapid decision-making. This means more flexibility and decision-making driven by local constraints and opportunities rather than solely central guidelines. Given that the U.S. market—a key region—has encountered some substantial challenges, empowering the local teams will help us regain lost momentum.

Operator, Operator

Thank you. Our next question will come from Steve Powers with Deutsche Bank. Please go ahead.

Steve Powers, Analyst

This question may build a bit on Oliver's question there on the U.S. organizational changes, but if we think about the cost savings initiatives you've announced and accelerated recently more holistically, is there a way to parse what proportion of these initiatives you would have done in any environment, which might suggest they are truly structural versus those that have been pulled forward in reaction to the current environment? That distinction may inform how we think about them returning to the cost structure when conditions turn more favorable, even if they come back in a slightly different form.

Laurent Mercier, CFO

Yes, thanks for the question. These are indeed structural interventions. It's crucial to emphasize that we are constantly rethinking and challenging our organization and ways of working due to the rapid changes in the market environment. The organizational change we implemented is part of comprehensively adapting to the fast-evolving omnichannel landscape. Additionally, we are working to optimize our cost structure while focusing on brand investment and regaining momentum.

Sue Nabi, CEO

To complement Laurent's answer, I would say that these are structural changes mixed with some conjectural adjustments. As Laurent mentioned, we are facing challenges from rising competitors such as Amazon, which may become the number one beauty retailer this calendar year. Simultaneously, we are witnessing the rise of TikTok Shop, which represents a significant sales channel merging entertainment with shopping. These dynamics necessitate continuous adaptation, often monthly.

Operator, Operator

Our next question will come from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong, Analyst

First, just a point of clarification on Consumer Beauty. If you could help clarify what drove volume to be flat while price/mix was the driver, given the weakness in Q3; I wouldn’t have expected that to be the case. Then, building on the all-in-to-win plan, could you talk about what's new about the streamlining as part of this plan compared to the previous savings targeted? Where will headcount reductions come from? As you think about your portfolio, should you be in all the brands that you currently have? Are you scrutinizing your portfolio regarding potentially exiting some underperformers or repositioning some of your brands that are underperforming? Thank you.

Laurent Mercier, CFO

Good morning, Olivia. Regarding the gap between volume and pricing, the primary reason for the Consumer Beauty category is that we had significant gaps in performance, particularly in color cosmetics, which we flagged was primarily a challenge in the U.S. However, we had strong performance in Brazil where we witnessed significant volume growth; although, in Brazil, the net revenue or price per unit is lower compared to other countries like the U.S. This geographic mix explains the gap between volume and price. Regarding your second question about streamlining support functions, we will keep you posted when the process is in motion. It's really about consolidating and centralizing support function activities, aligning them with the new commercial organization that Sue described. We already initiated the consolidation of demand planning into a single hub, and this is what is already underway.

Sue Nabi, CEO

As for the portfolio question, Olivia, we are continually evaluating the relevance of our portfolio and long-term opportunities through an ROI-driven lens for each brand, category, and market. Not every brand in our portfolio may continue to be viable, and we are currently scrutinizing brands like SKKN, which we’ve just started reassessing recently, as indicated in our Q3 discussion.

Operator, Operator

Thank you. Our next question will come from Ashley Helgans with Jefferies. Please go ahead.

Ashley Helgans, Analyst

I know you talked a little bit about retail inventory levels, so I was wondering if you could expand on how selling and sell-out trends or retail tightening varies by region. Additionally, for the mid-single-digit price increases planned this summer, is that going to be across the total Prestige portfolio or just select brands? Thanks.

Laurent Mercier, CFO

Indeed, regarding selling versus sellout trends, we’ve seen disconnects in the U.S., primarily driving our declines, and we are actively working to reconcile those. In other regions, Europe remains quite healthy, where we observe both sell-in and sell-out aligning well. Latin America, especially Brazil, is also tightly managed. Asia remains small for us with limited exposure, although we note ongoing headwinds in China. Retailers are tightening their inventory controls as well. Regarding the planned price increases, we are focusing first on the U.S. Prestige segment due to the mechanical effects resulting from sourcing in Europe. It’s a standard adjustment that needs to be made across all players, as we are confident in the inelasticity of this category. We will look to implement price increases selectively in other categories and regions where we can maintain volume integrity.

Sue Nabi, CEO

To complement Laurent's point, Ashley, we believe in maintaining demand despite potential price increases on Prestige fragrances. We are simultaneously increasing touches with body mists, small formats, and pan sprays—efforts that have not been made in the past. We expect that these strategies will preserve healthy demand from consumers seeking value proposals from our brands.

Operator, Operator

Thank you. Our next question will come from Andrea Teixeira with JPMorgan. Please go ahead.

Andrea Teixeira, Analyst

My question is on the U.S. Color Cosmetics. Looking at the success you had elevating Rimmel in the U.K., and understanding that you've employed similar strategies in the U.S. What do you think worked well abroad that hasn't translated here? What is the new leadership aiming to do differently from the past—do you think the market structures are completely different? What works in the U.K. may not work in the U.S. and vice versa? Lastly, related to Laurent's point on cost-saving measures, how much will flow through to the bottom line? Thank you.

Sue Nabi, CEO

Yes. Good morning, Andrea. Your question is valid. At the end of the day, there are indeed structural differences; however, the question hinges more on intensity rather than absolute stakes. Both U.S. and European markets face disruptions from indie brands, but the impact is significantly more pronounced in the U.S. The delayed reaction in the U.S. market lies in the heightened competition from indie brands dominating sales space. Additionally, the approach we've adopted through tests in the U.K. allows us better insights before implementing similar initiatives in the U.S. We believe that implementing our successful Rimmel strategies, especially the TikTok Shop experiments we did in the U.K., starting next month with CoverGirl, should yield positive results. Regarding your question on the $370 million in savings, perhaps Laurent can elaborate.

Laurent Mercier, CFO

Thank you, Andrea. The $370 million is composed of ongoing productivity savings of $120 million in addition to the $130 million from recently announced measures to streamline operations. Importantly, these will be structural interventions, and achieving this savings will allow us to manage current volatility while continuing to invest in brand momentum. We aim for constant EBITDA margin improvements ranging from 20 to 30 basis points annually. This year's performance of 70 basis points improvement serves as a clear example of our efforts, positioning us for continued growth even amidst reversing one-off effects from the previous year.

Operator, Operator

Our last question will come from Anna Lizzul with Bank of America. Please go ahead.

Anna Lizzul, Analyst

Hi, good morning. Thank you so much for the question. I was wondering if we could take a step back just thinking about the current market conditions for Prestige versus Consumer Beauty. On Consumer Beauty, we've seen some weakness in lower income tiers in U.S. Mass Beauty, broadly speaking. I'm curious if you're observing this drive incremental weakness. In Prestige, are you noting any slowdown or incremental weakness among higher-income consumers?

Sue Nabi, CEO

Anna, this is Sue speaking. Let me start with the Prestige division. So far, we have seen normalization in fiscal '25, moving from either high single digits or low teens to mid-single digits, which we have been guiding throughout that this market will evolve globally. We do not see concern for the Prestige market. Regarding Color Cosmetics, there is pressure arising from both Asia and travel retail, similar to what some of our peers are experiencing. The trend of consumers refocusing on value appears to be affecting growth. In contrast, we see the fragrance segment growing as significant historical brands continue to consolidate their presence, creating opportunities for traditional brands. Overall, these dynamics lead us to believe that the Prestige fragrance market is structurally growing, which we expect will intensify as consumer engagement increases through the growing popularity of body mists and affordable fragrance formats.

Laurent Mercier, CFO

In Consumer Beauty, we are observing two dynamics. The global category entered into low single-digit negative territory. Within this category, we're grappling with mid-single-digit decline in color cosmetics while mass fragrance is experiencing strong growth. We are assuming that the Color Cosmetics category will remain negative in fiscal '26 while also betting heavily on mass fragrance acceleration, and we are well-positioned to seize this opportunity given our number one position worldwide in this category.

Sue Nabi, CEO

Thank you very much for giving me this opportunity, and thank you for the questions. Let me zoom out for these closing remarks. Across the latest economic cycles, beauty has remained resilient in these four decades. Even amid this challenging landscape, we have significantly strengthened our strategic operational and financial fundamentals. We've been driving gross margin expansion and stronger cash flow generation while substantially deleveraging the company over the past four years. Of course, while we are not satisfied with our net revenue performance in fiscal '25, our strong fundamentals coupled with our multi-branded attack plan, the best in the last five years, and the recipes of '23 and '24, along with efficiency initiatives, give us strong confidence in the years ahead.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's program, and we appreciate your participation. You may disconnect at any time.