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Weak Nail Care Sales Clip Coty's Q1 Results

November 7, 2013

Sales fall 2.6% to $1.1 billion.

Impacted by lower demand for fine fragrance and nail enamel, Coty Inc.'s first quarter sales fell 2.9% to $1.17 billion.

"In the first quarter we faced a significant market slowdown in the fragrance and nail categories, particularly in the US," explained Michele Scannavini, CEO of Coty Inc. "This triggered heavy trade destocking and a slower order pace that meaningfully affected our US mass market and overall business. On the other hand, we are very pleased with our growth in the prestige channel and in the emerging markets, areas we had targeted for accelerated development."

To return to top-line growth in the fiscal second quarter and beyond, Coty is focused on its color cosmetics business as well as expanding in emerging markets. In fiscal Q1, sales in the Americas fell 10% primarily caused by consumption slowdown in the mass nail and fragrance markets, and consequently reduced low orders and trade destocking particularly in the US mass channel. Excluding the Americas, net revenues in the rest of the world grew, with EMEA up 2% and Asia Pacific up 7%. Emerging markets had strong 8% growth. By segment, the decline was concentrated in color cosmetics, particularly in Sally Hansen, which was impacted by the sudden and sharp trend inversion in the US nail market as well as increased competitiveness in the category. Fragrances grew 1%, led by power brands Calvin Klein, Chloe and Davidoff. Skin & Body Care had a marginal decline, with Philosophy recording solid growth for the second consecutive quarter.

Net income increased 8% to $93.5 million.

In another move, Coty has formed a wholly owned subsidiary in South Africa in order to direct, manage and fully operate all of its South African business as well as its business in 13 other African countries. The enhanced operating structure marks the latest important strategic move by Coty as it continues making strides in increasing its presence in key emerging markets.

Through a strategic agreement with long term partner Indigo Brands Proprietary Limited, a wholly owned subsidiary of AVI Ltd., Coty has secured Indigo and other subsidiaries of AVI as the exclusive manufacturer, distributor and marketer of Coty's value brands.  For the past 13 years, Indigo has served as the exclusive licensee of Coty's mass brands in South Africa.

This new agreement will allow Coty to closely manage its business, give it more financial freedom to promote Coty mass brands sales growth and enable the beauty giant to increase its footprint in the region.

"This enhanced operating agreement will allow us to drive growth in Africa," said Scannavini. "We have been very happy with our partnership with Indigo and look forward to working with AVI. Our 13 year history of successful collaboration is a positive sign of even better developments yet to come."

"AVI is pleased that its long term relationship with Coty has once again been extended. We are confident that the revised commercial terms between the parties will result in robust growth and innovation for the Coty brand portfolio both in South Africa and the broader African region," said AVI's CEO, Simon Crutchley.

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