Coty's Q3 Earnings: Revenue Holds Steady Amid Strategic Shifts

Coty Inc. (NYSE: COTY) reported third-quarter fiscal 2025 results, posting revenue of $1.3 billion, narrowly missing Wall Street estimates of $1.31 billion. While the cosmetics giant faces headwinds in its mass-market division, its premium fragrance portfolio and cost-cutting initiatives offer a glimpse of resilience. Here’s a deep dive into the numbers and what they mean for investors.

Performance Overview: A Fragrance-Driven Quarter

Coty’s revenue decline of 6% year-over-year in Q3 (down to $1.299 billion) was driven by two key factors:
1. Foreign Exchange Headwinds: FX impacts reduced revenue by 3%, with weakness in emerging markets like Argentina and Brazil.
2. Consumer Beauty Decline: The mass-market segment fell 9% as color cosmetics demand softened, prompting a $212.8 million impairment charge.

However, the Prestige segment (which accounts for 64% of sales) showed resilience, growing 2% in constant currency. Fragrance sales, powered by launches like Burberry Goddess and Hugo Boss, offset weaker prestige cosmetics performance.

Segment Analysis: The Two-Speed Coty

The stark divergence between Coty’s segments is critical to understanding its trajectory:

Prestige Division: Fragrance Growth Amid Inventory Adjustments

• Adjusted EBITDA Margin: Expanded to 22.4% in Q3 (+250 bps year-over-year), reflecting pricing power and cost discipline.
• Growth Drivers:
• Fragrance sell-out grew at a high single-digit rate, though retailers reduced orders in the U.S. and Europe.
• Brands like Marc Jacobs (up double digits) and Chloe (mid-single-digit growth) outperformed.

Consumer Beauty Division: Struggling with Inventory and Demand

• Adjusted EBITDA Margin: Dropped to 3.9%, with mass color cosmetics sales down 5% LFL.
• Key Issue: U.S. retailers cut orders for CoverGirl and Rimmel, while Australia and Europe tightened inventory.

Financial Health: Margin Improvements Offset Debt Concerns

While Coty’s reported net loss widened to $409 million (vs. $0.5 million profit in Q3 2024), adjusted metrics tell a better story:
- Adjusted EBITDA: Rose 2% to $204 million, with a margin of 15.7% (+130 bps).
- Leverage: Financial net debt stood at $3.6 billion (3.2x EBITDA), manageable but elevated.

The company reaffirmed its FY2025 guidance for $300 million free cash flow, a key priority for deleveraging.

Strategic Initiatives: Betting on Fragrance and E-Commerce

Coty’s path forward hinges on three pillars:

1. Fragrance Dominance:
2. Plans include two “blockbuster” launches in FY2026 (one per half-year) and expansion into ultra-premium categories.

3. The Swarovski fragrance collaboration (launching in 2026) aims to tap into luxury consumer demand.

4. Cost Savings:

5. The All-in-to-Win program targets $500 million in savings by 2027, including $120 million in annual productivity gains.

6. Restructuring charges ($75.7 million in Q3) underscore the push for efficiency.

7. E-Commerce and TikTok:

8. Online sales now account for 20% of revenue, with Coty leveraging platforms like TikTok Shop for growth.

Risks and Challenges

• Debt Pressure: High leverage (3.2x) requires disciplined cash flow management.
• Consumer Beauty Recovery: Reviving mass cosmetics demand—particularly in the U.S.—remains uncertain.
• FX Volatility: Emerging markets like Argentina (which contributed 3% to LFL growth) face hyperinflation risks.

Conclusion: A Fragile Foundation for Recovery

Coty’s Q3 results highlight a company in transition. While its premium fragrance division and margin improvements provide hope, the Consumer Beauty segment’s struggles and elevated debt mean patience is required.

Investment Takeaway:
- Bull Case: Fragrance launches in FY2026, cost savings, and e-commerce growth could push adjusted EPS toward $0.50–0.52, supporting a rebound in shares.
- Bear Case: Persistent FX headwinds and weak U.S. mass cosmetics demand could delay recovery.

At current levels (~$2.50/share), Coty trades at 5x forward EV/EBITDA—a discount to peers like Estée Lauder (8x). However, investors should weigh the risks: while Coty’s fragrance strategy is sound, execution in cost-cutting and inventory management will determine if this value plays out.

Final Verdict: Hold for now. The stock offers potential upside if FY2026 launches succeed, but near-term headwinds demand caution.

Data as of May 2025. Always conduct your own research before making investment decisions.