Cosmetics maker Coty Inc. reported worse-than-expected results in its fourth quarter, posting a US$1.2 billion drop in sales year on year as consumers stuck at home during the pandemic skipped beauty-product purchases.

Sales of US$922.1 million in the company’s fiscal fourth quarter were down 56 per cent year on year and worse than analysts’ estimate of US$1.34 billion.

Key Insights

After a brutal spring and summer with many on lockdown around the U.S. and world, the owner of Max Factor and Covergirl says things are starting to turn around, albeit slowly. The company saw sales get gradually better from April through June, with “significant improvements” in July and August, it said. Coty expects to return to profitability in the current fiscal quarter -- but only when it comes to adjusted operating income for continuing operations.

Outgoing Chief Executive Office Peter Harf, who hands the reins to Sue Nabi in September, said he worked during the last three months to “re-steer the company back on track,” including cleaning up the capital structure, financial under-performance, the product portfolio and management.

Margins in a difficult quarter were also under pressure. The adjusted gross margin of 40.6 per cent was sharply down from 60.8 per cent in the same period last year. Coty attributed that to the pandemic-wrought drop in sales plus “underutilization expenses” related to the temporary shutdown of some manufacturing plants.

To turn things around, the company has taken a series of steps recently to revamp its operations, including a deal in May to sell its Wella and Clairol brands to buyout firm KKR & Co. The Wella divestiture is on track to close by the end of the calendar year, Coty said Thursday.

Coty has also tied its fortunes more closely to the Kardashian family, investing a combined US$800 million in cosmetics lines by Kylie Jenner and Kim Kardashian West in the hopes of appealing to younger customers. Coty said its Americas segment benefited from the contribution from the Kylie Beauty tie-up, though the brand was pressured in the latest quarter following the lockdown of its third-party manufacturer’s fulfillment center. However, “Kylie Skin remained operable during the quarter, generating solid sales growth.”

Market Reaction

The shares fell as much as 9.1 per cent -- the most intraday in more than two months -- to US$3.50. The stock had declined 66 per cent this year through Wednesday’s close.