Coty cleans up balance sheet and bets on a new sales strategy

Coty has achieved its lowest debt-to-earnings level in nearly a decade and reported that its Q2 results for fiscal 2026 were broadly in line with its expectations. The global beauty company says it cut its financial net debt to US$2.6 billion, reducing leverage to 2.7 times. 

Despite the easing debt pressures, the company’s profitability weakened. It cites higher promotional activity and tariffs, while a higher share of its sales came from lower-margin regions.

Coty’s Consumer Beauty segment saw sales decline 2%, while Prestige sales rose 2%. The beauty giant’s CoverGirl and Rimmel brands, both under the Consumer Beauty segment, will receive focused investments in the year ahead.

Consumer Beauty’s 2% decline resulted in a reported revenue of US$545 million, accounting for 32% of group sales. The Prestige segment, which includes brands such as Hugo Boss, Burberry, Calvin Klein, and Kylie Cosmetics, accounted for 68% of group sales in the quarter.

At the company level, net revenue rose 1% year-on-year to US$1.68 billion, supported by foreign exchange, but underlying sales declined 3%.

Coty withdrew its full-year FY2026 guidance for EBITDA and free cash flow. It now expects its underlying revenue to decline by a mid-single-digit percentage in Q3, mainly due to weakness in Consumer Beauty.

Markus Strobel, who took over as interim CEO at the start of January, says his onboarding comes at a “pivotal moment.”

“Our financial performance over the past year and a half has been disappointing, and our current share price reflects that reality. Both things are true: Coty has outstanding assets and capabilities, yet we have not been delivering at the level we should,” Strobel says.

As the company seeks to reset performance, the new leadership is introducing a strategic framework, Coty Curated. The strategy encompasses “sharper priorities, more focused investments, improved execution, and increased support behind our core businesses.”

These moves come alongside Coty’s portfolio review, which recently saw the divestment of its remaining stake in the Wella brand. 

Consumer Beauty trails Prestige

Coty’s Prestige segment generated US$1.13 billion in Q2. The sector’s makeup recorded mid-single-digit growth, led by Burberry and Kylie Cosmetics, while skin care delivered double-digit growth, driven by Lancaster and Philosophy.

On a year-to-date basis, Prestige revenue declined 1%, as skin care growth did not offset softer sales in fragrance and makeup.

Coty’s Consumer Beauty segment remained under pressure during the quarter.In Consumer Beauty, color cosmetics posted a mid-single-digit decline, while body care and mass fragrance recorded low-single-digit declines. According to the company, double-digit growth in mass skin care helped partially offset the declines. 

Consumer Beauty’s profitability weakened, as the company reported its adjusted operating margin fell to 5% from 13.3% the year before. It cites lower volumes, higher brand investment, and an unfavorable geographic mix as key contributors to the decline.

Coty reported that tariffs and promotions also impacted its results, as the group’s adjusted gross margin declined to 64.2%, down 260 basis points from the year before.

Cashing in caution

In Q2, higher operating cash flow allowed Coty to generate US$513.1 million in free cash flow, up from US$419 million the year before.

The company’s total debt fell to US$3.04 billion from US$4.07 billion at the end of September 2025. Proceeds from the Wella divestiture helped boost the figure. Coty received US$750 million in upfront cash from the sale of its remaining 25.8% stake in the brand to KKR. It used most of these proceeds to pay off its long-term debt.

As a result, the company’s financial net debt declined by over US$600 million quarter-on-quarter, which brought its debt leverage down from 3.7 times EBITDA to 2.7 times. 

While the Wella sale helped ease Coty’s debt burden, the deal also resulted in a realized loss and lower gross profit. The company reported a net loss of US$126.9 million, compared with a net income of US$20.4 million the year before.

For the third quarter, Coty expects its underlying revenue to decline at a mid-single-digit rate. It forecasts an adjusted EBITDA of between US$100 million and US$110 million.

Coty further expects free cash flow to turn negative in the third quarter due to seasonality and anticipates another US$30 million hit in cash taxes related to the Wella sale.

With hopes fixed on the Coty Curated strategy, Strobel concludes: “I believe Coty is well positioned to deliver consistent, profitable growth and realize its full potential.”