Coty Q3 Earnings Call Highlights

Key Points

• Like‑for‑like sales fell about 7% in Q3, with an estimated 1.4% drag from the Middle East conflict that disproportionately hit prestige fragrances; management expects Q4 like‑for‑like revenue to decline a mid‑single‑digit percentage, with a further 2–3% Middle East headwind.
• Profitability and margins are under pressure: adjusted gross margin dropped ~250 bps to 61.8%, Consumer Beauty adjusted EBITDA was hit by gross‑margin headwinds and included a $363 million impairment, even though adjusted EBITDA and EPS came in ahead of guidance.
• Coty is pursuing cost and portfolio actions to deleverage and improve returns, reporting >$15 million in fixed cost savings and >$50 million in productivity savings in Q3, targeting ~$200 million of cumulative fiscal 2026 savings, with free cash flow of $276 million YTD and leverage around 3.4x aiming toward ~2x.

Coty NYSE: COTY reported a challenging third quarter for fiscal 2026 as the company navigated sales pressure, category mix shifts, and disruption tied to the Middle East conflict, while management emphasized a renewed focus on “sell-out” trends and tighter prioritization under its Coty.Curated framework.

In prepared remarks, Executive Chairman and Interim CEO Markus Strobel said the operating environment remained “mixed,” and described an increased focus on allocating resources to “fewer, higher impact core initiatives” as Coty aims to improve performance over time. CFO Laurent Mercier added that while certain profit metrics came in ahead of guidance, the company remains “not satisfied with the current level of profitability.”

Third-quarter sales pressured; Middle East conflict a key headwind

Strobel said Coty’s like-for-like sales declined 7% in the quarter, including an estimated 1.4% negative impact from the Middle East due to escalation of the regional conflict. Excluding that impact, Strobel said like-for-like sales were in line with the guidance Coty had previously shared.

He attributed the comparatively larger impact to Coty’s portfolio and channel mix, noting the Middle East represents a “mid-single-digit percentage” of total sales, including local travel retail. With fragrances a dominant category in the region, Coty experienced a more sizable effect on its prestige business, and the company expects the conflict to remain a near-term headwind, “particularly in prestige.”

Strobel also framed Coty’s performance against broader category trends, saying global prestige beauty grew about 5% in Q3 and 4% year-to-date, with mass beauty also up about 5% in Q3 and 4% year-to-date.

Prestige: sell-out slightly positive; shipments and promotions weighed on results

In Prestige, Strobel said sell-out was “slightly positive” in Q3, while prestige like-for-like sales declined 5%, including an estimated 2-point headwind from the Middle East. Excluding that impact, he said prestige like-for-like sales were in line with expectations.

Performance was mixed by category, with “strong momentum” in prestige cosmetics in the U.S., while prestige fragrance sell-out declined modestly. Strobel said the gap between prestige sell-out and like-for-like sales reflected three factors:

• An estimated 2% impact of the Middle East conflict on late-Q3 orders
• A promotional environment that pressured results
• More moderate sell-in after a “somewhat softer” holiday period, even as Coty’s tracking suggests structural retail destocking is “largely completed”

Strobel highlighted recent innovation including BOSS Bottled Beyond, Cosmic Kylie Jenner Intense, and early reads on Calvin Klein Euphoria Elixirs. He said the company’s focus is on ensuring innovation drives incrementality and creates “a broader halo” on core franchises into fiscal 2027.

Consumer Beauty: sell-out improved in pockets, but profitability under pressure

In Consumer Beauty, Strobel said Q3 sell-out declined about 3% while like-for-like sales fell 10%. He said the company continues to trail the market, but that the gap has “gradually narrowed,” driven primarily by color cosmetics brands. In the U.S., he said CoverGirl and Sally Hansen are outperforming the category on a unit basis, while European brands remain under pressure.

He also pointed to lifestyle fragrance as “a large drag” in Q3 and year-to-date, tying the weakness to a portfolio where priorities and resources were historically spread across too many initiatives. Strobel said the gap between shipments and sell-out in Consumer Beauty reflects actions to streamline under-scale launches and markets in mass cosmetics, including exiting “small subscale markets” that did not meet profitability thresholds, which has impacted year-over-year shipments but is intended to support sequential sell-out improvement through more concentrated execution.

Mercier said Consumer Beauty adjusted EBITDA was “under significant pressure” in Q3, driven “almost entirely” by gross margin headwinds. He identified three main drivers: under-absorption of supply chain costs due to sales declines, higher excess and obsolescence tied to smaller-scale initiatives that did not meet expectations, and tariff costs.

Mercier also said Consumer Beauty results included a $363 million impairment charge after a “significant decline” in Coty’s share price over the last three months, reflecting a reduction in carrying value driven by lower forecasted revenues and a higher weighted average cost of capital.

Margins, cost actions, and transformation savings

Mercier reported adjusted gross margin of 61.8% in Q3, down 250 basis points year over year. On a year-to-date basis, adjusted gross margin was 63.6%, down 200 basis points. He said results were in line with expectations given the operating environment and mix dynamics previously discussed.

He cited three main drivers of the quarterly gross margin decline: supply chain under-absorption due to sales declines (particularly in Consumer Beauty), higher excess and obsolescence, and tariff and freight headwinds. Mercier said these pressures are expected to persist into Q4, with some moderation anticipated as simplification efforts begin to flow through.

Adjusted EBITDA and adjusted EPS (excluding the equity swap) came in ahead of Q3 guidance, Mercier said, though he emphasized that profitability remains weak in absolute terms. He said A&CP remained in the “high 20s” as a percentage of sales, and that upside versus guidance reflected better execution on fixed cost reductions and the decision to reallocate some A&CP toward key Q4 consumption events.

Mercier said Coty generated more than $15 million in fixed cost savings in Q3, in addition to more than $50 million in productivity savings. He said the company’s transformation program, announced in April 2025, has included headcount reductions of more than 400 positions year-to-date, and Coty continues to expect about $200 million in cumulative fiscal 2026 savings, with additional savings in fiscal 2027.

Cash flow and outlook: mid-single-digit sales decline expected in Q4

On capital allocation, Mercier said deleveraging remains the top priority. Coty generated $276 million of free cash flow year-to-date, up $33 million, or 14%, year over year, supported by working capital and CapEx discipline. He said Coty exited Q3 with leverage of approximately 3.4x and reiterated the goal of reducing leverage toward 2x over time to achieve and sustain an investment-grade credit profile.

For the fourth quarter of fiscal 2026, Mercier guided to like-for-like revenue declining by a mid-single-digit percentage, assuming moderate sequential improvement in both divisions from easier comparisons, largely offset by ongoing Middle East headwinds expected to reduce Q4 sales by 2% to 3%. He said foreign exchange is expected to be broadly neutral.

Gross margin is expected to decline about 100 to 200 basis points year over year in Q4 due to operating deleverage, tariff impacts, and elevated excess and obsolescence, partially offset by productivity and procurement actions. For fiscal 2026, Mercier guided to adjusted EBITDA of approximately $838 million to $848 million and adjusted EPS excluding the equity swap of $0.33 to $0.35. Based on the guidance, he said Coty estimates Q4 adjusted EBITDA of $85 million to $95 million and adjusted EPS excluding the equity swap ranging from breakeven to a loss of $0.02 per share.

Looking further ahead, Strobel said Coty.Curated centers on “scaling what works, stopping what dilutes, and removing layers that slow execution,” with a greater emphasis on fewer launches, higher consumer engagement spending focused on advocacy and influencers, and a stronger sell-out discipline. He also said Coty will exit all operations and boutiques of Orveda, while sharpening focus for Lancaster and Philosophy. Strobel characterized recent improvements as “early green shoots,” adding that progress will not be linear as the company seeks to strengthen sell-out, market share, and long-term profitability.

About Coty NYSE: COTY

Coty Inc is a multinational beauty company specializing in the development, manufacturing and marketing of fragrances, color cosmetics and skin and body care products. Established in 1904 by François Coty in Paris, the company has grown through a blend of organic innovation and strategic acquisitions to become one of the leading players in the global beauty industry. Coty's portfolio encompasses a broad range of consumer and luxury brands, reflecting its commitment to catering to diverse consumer preferences and market segments.

The company's product offerings span three main divisions: Coty Luxury, Coty Consumer Beauty and Coty Professional Beauty.

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