Coty (NYSE: COTY) reported Q2 EPS of $0.11, $0.10 worse than the analyst estimate of $0.21. Revenue for the quarter came in at $1.67 billion versus the consensus estimate of $1.73 billion.

Outlook

Fiscal year-to-date, the beauty market has continued to grow at a healthy pace, though growth has moderated from the outsized levels of the last few years, which were amplified by industry price increases. Prestige fragrances remain an outperforming category in beauty, even with moderation in the category growth from low double digit percentage growth in FY24 to high single digit percentage growth in Q2. Mass beauty has moderated from high single digit percentage growth in FY24 to low single digits in Q2, including flat performance in the mass cosmetics category. Within this market backdrop, the APAC region remains pressured due to ongoing headwinds in China and Travel Retail Asia, and at the same time, key retailers around the globe continue to tightly manage orders and inventory levels, further exacerbated by significant channel shifts in U.S. mass beauty. As a result of these factors, Coty expects LFL sales trends in 2H25 which are broadly consistent with its Q2 LFL sales trend at -1% to -2%. The significant strengthening of the U.S. dollar is expected to drive a more material FX headwind in 2H25 of approximately 3%, resulting in FY25 reported sales declining in the low single digits percentage.

Given the complex retail demand environment, Coty now assumes a broadly similar market environment entering FY26. However, several key brand initiatives and distribution opportunities planned for FY26 should support some gradual improvement in Coty\'s LFL sales growth.

In this uncertain beauty market environment, Coty continues to act with agility, activating strong cost savings initiatives, maintaining promotional discipline, and protecting its cash flow. Coty continues to expect FY25 savings of over $120 million, with these and additional projects expected to deliver further savings in FY26 and beyond. Coty continues to expect solid gross margin expansion in FY25, fueled by the strong gross margin improvement delivered in 1H25. These levers will support ongoing strong investment behind its brands, with A&CP expected to remain in the high 20s percentage.

Through the combination of gross margin expansion, ongoing brand support, short-term cost containment efforts and structural cost savings programs, Coty targets adjusted EBITDA margin expansion of 70-90bps both in 2H25 and FY25, an acceleration from the 30 bps adjusted EBITDA margin expansion in FY24. This implies adjusted EBITDA growing in the low single digits to $1,115-1,125M, which includes a low-to-mid single digit headwind from FX.

Coty\'s steady debt reduction is now translating to an anticipated sizeable reduction YoY in the FY25 interest expense. As a result, Coty now expects FY25 adjusted EPS excluding the equity swap of $0.50-0.52, reflecting mid-to-high single digit percentage growth, which includes approximately 4% negative impact from the discrete tax benefits recognized last year.

Finally, Coty expects FY25 free cash flow to grow roughly 10% YoY to approximately $400M. In light of the more uncertain environment for the next couple of quarters, further pressured by FX headwinds, Coty is targeting a year-over-year reduction in leverage exiting CY25 of 0.5x or more, resulting in leverage below 2.5x with the goal to reach closer to 2x, which factors in the cash true-up payment related to Coty\'s equity swap. This does not take into account proceeds from the Wella divestiture, which would further accelerate both deleveraging and shareholder returns.

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