COTY INC. 1Q27 Q&A EARNINGS CONFERENCE - COTY INC

Financial Performance:

• Gross margin declined 120 basis points year-over-year, driven by 50 basis points in Middle East freight/material cost headwinds and unfavorable mix/excess and obsolescent (E&O) stock; E&O stems from past scattered innovation with small launches.
• Top six core prestige brands grew 5% organic, while the broader consumer business decline improved from 8% in H1 2026 to 3% in Q1, indicating a recovery in market share.
• Asia net sales increased 8%, led by a strong performance in China; the U.S. showed progress but has not yet reached strategic targets.
• The company received $250 million upfront in a Gucci license exit agreement, with a total deal value of $400 million covering one year of lost profit/cash flow, inventory, and restructuring costs.
• Forecasting includes a $30–40 million headwind from Middle East costs and oil prices exceeding $100/barrel; management plans to utilize productivity levers to protect brand investment.

Guidance and Future Outlook:

• Q2 guidance was not provided; full-year guidance is expected in conjunction with the completion of the strategic review and savings/restructuring plans by January 2027.
• Fiscal 2027 is designated as a "transition year" with non-linear recovery; the strategic review is scheduled for completion by the end of calendar 2026.
• Management expects the top six core prestige brands to continue growing in Q2 and remains confident in sustained innovation-driven growth.
• Long-term goals include reducing debt, converting strong brand performance into cash flow, and extending license durations to de-risk investments.

Business Segments and Product Lines:

• Prestige: Focus shifted to six core brands with concentrated "fewer, bigger" launches (e.g., Boss Bottled, Burberry Amber Vanilla, Marc Jacobs Beauty) that are tracking ahead of objectives; SKU portfolios are being tightened to improve shelf productivity.
• Consumer: The "Color the Future" strategy for CoverGirl is showing results with lower return rates and sharper innovation bundles; a new proprietary mascara launch is scheduled.
• Licensing: The Marc Jacobs beauty makeup launch was a success due to co-development with Sephora and creator-led advocacy; the Gucci license exit is in transition with plans finalized by January.
• New Initiatives: Launching Etro in the super-premium segment in spring 2027 and the Burberry Prosmi collection; expanding the "Codi Curated" strategy to deepen retailer partnerships (e.g., Sephora, HyROX).

Market and Competitive Landscape:

• The global fragrance market grew 5% in Q1; the "uber-prestige" and super-premium segments are identified as high-growth areas where the company is increasing investment (e.g., Atelier de Fleur de Chloé).
• Competition is intensifying with high activity in the influencer and creator economy; the company is doubling down on advocacy to capture market share, noting share gains on Hugo Boss in Germany.
• Retailer holiday activities are starting earlier, prompting CODI to adjust its calendar to ensure security on shipments and sales.
• The company sees a strategic shift toward longer license durations (approaching perpetuity) to provide investment security for both the licensor and licensee.

Risks and Challenges:

• Persistent cost headwinds from Middle East freight and material inflation, exacerbated by potential oil prices above $100/barrel.
• Exposure to excess and obsolescent inventory due to previous fragmented innovation strategies; while visible, management is working to reduce this through improved S&OP and forecasting AI tools.
• The financial impact of the Gucci license exit (approx. 40% of the prestige contribution) requires management to implement a comprehensive savings and restructuring package.
• Soft market consumption in European prestige markets (specifically Germany and France) presents a hurdle to overall growth targets.

Management Commentary and Tone:

• Tone is confident yet transparent about the difficulties of the current transition year; management acknowledges that results will not be linear and emphasizes the need for patience.
• Executive Chairman Marcus Strobel and CFO Soraya Benchik demonstrated clarity on the "Codi Curated" strategy, emphasizing focus, discipline, and the shift to larger, more successful innovation bets.
• Management expressed strong conviction in the long-term value of longer license durations and the strategic optionality provided by a healthy balance of prestige, consumer, and skincare segments.

Analyst Questions and Answers:

• Gross Margin & Guidance: Explained the 120bps margin decline; no Q2 guidance provided, but confirmation of continuing growth in top six brands.
• Portfolio Strategy: Clarified that no conclusions should be drawn about exiting skincare from Q1 data; all business units are being evaluated for a strategic review ending in 2026.
• Gucci Impact: Quantified as a $400 million total agreement value; impact is managed via upfront cash and restructuring plans to be released by January.
• AI & Marketing: Details provided on the Brandlight partnership for AI-driven search optimization, focusing on depth (top 6 brands, top 5 markets) rather than breadth.
• CoverGirl & Innovation: Success factors for CoverGirl include sharper bundles, consistent media spend on key properties, and proprietary tech; prestige growth would have been ~3% without the Marc Jacobs pipeline fill.
• Licensing Model: Reiterated the industry trend toward longer-term licenses to de-risk investment, citing security for reinvestment in brands like Hugo Boss and Burberry.

Other Key Points:

• The company is deploying AI tools to enhance forecasting reliability and inventory management to reduce future E&O.
• A specific focus on "advocacy" is driving performance, with influencer share rising 50-100 basis points across key brands.
• Retailers are pushing for earlier holiday engagement, requiring CODI to adapt its seasonal planning.
• The company remains on track to reduce debt and will prioritize transparency and accountability as it executes its turnaround strategy.