Krause Fund Research Fall 2017

Consumer Staples Coty Inc (NYSE: COTY)

Recommendation: BUY November 10, 2017

Analysts Current Price $16.31 Yuchen Gao Macy Lanser [email protected] [email protected] Target Price $20-22 Mingfeng Huang Emily Phelps [email protected] [email protected] Key Investment Highlights

Company Overview Coty Inc. (COTY) is a multifaceted business that • High Five-Year Sales Growth: The acquisition of P&G focuses on Luxury, Consumer, and Professional Beauty and exclusive long-term license rights of Burberry Beauty. There are 75 brands in Coty’s portfolio, Limit have generated a more diversified product portfolio, including Covergirl, Rimmel, Sally Hansen, Clairol, which will enrich the growth of Coty’s revenue stream. Gucci, Calvin Klein Fragrances, and OPI. Consumer The stock price will be affected by this high five-year sales Beauty focuses on color cosmetics, retail hair coloring, growth of approximately 13%, when the synergies of cost and styling products, body care and mass fragrances are realized. that are affordable to the everyday citizen. Luxury • High Invested Capital: Coty has a high continuing value beauty focuses on high quality fragrances, premium growth due to the large invested capital the company skincare, and premium cosmetics. Professional beauty acquired from the P&G merge. The premium between focuses on hair and nail care for salon owners and 22.6% - 34.9% over its market price is the directed result salon professionals. of prolonged value the high invested capital could bring. • Men and Women are Using More Personal Products: Stock Performance Highlights The average female uses approximately 27 products in 52 week High $20.88 her daily beauty routine, a number that has doubled in 52 week Low $14.24 the past decade. Men are also using more products in the Beta Value 0.800 past several years which has created a large growth Average Daily Volume 7.02 m opportunity. This increase in the use of products shows a growing industry that Coty is taking advantage of entirely. Share Highlights • Potential Arbitrage Opportunity: The market Cap of Market Capitalization $12.22 b Coty is 12.546B is significantly smaller than the other Shares Outstanding 749.40 m industry leader, (EL)’s 46.55B. This makes Coty Book Value per share $12.45 an “underdog” company with a high growth prospective. EPS 2017 $(0.59) Dividend Yield 3.07% One Year Stock Performance Dividend Payout Ratio -8.25%

Company Performance Highlights ROA -1.87% ROE -4.28% Sales $7.65 b

Financial Ratios Current Ratio 0.94 Debt to Equity 1.28

Important disclosures appear on the last page of this report. production over the next few quarters. Rapid Executive Summary employment growth and a high level of consumer confidence will continue to contribute to the GDP Our team recommends to BUY Coty Inc. for the Krause growth. The Conference Board’s Global Leading Fund. Coty is a growing business with many new product Economic Index suggests that the emerging economies lines and opportunities. We believe that they are going are picking up some speed. All major global economies to do very well these next couple years due to the new are expected to perform well in the next couple of years. trends and growing consumer demand. The growing economy is also a reason that we believe buying Coty is Interest Rates a good idea because of the businesses discretionary The Interest Rates are an important tool for the Fed to nature. achieve its monetary policy goal, due to an inverse relationship between interest rates and the unemployment rate. In addition, the lower interest rates Economic Outlook encourage people to borrow money to stimulate the economy, which would bring up the inflation Gross Domestic Product level. Investors in Consumer Staples would like to see Real GDP represents all the goods and services a country lower interest rates for this reason. produces within a specific period. The growth and decline of this economic driver could well reflect the We believe in a short term (6-month period), the Fed will production level of a country. In addition, it directly not raise the interest rates. According to the 2017 reflects the health condition of the economy in the Economic Calendar on Bloomberg, the PMI particular region. If the real GDP growth rate remains Manufacturing Index was down five tenths from July, steady or exceeds expectations, consumers normally which results in the weakest reading since June 20163. increase their consumption. In other words, the Specifically, new orders reflected more domestic Consumer Staples sector would be rewarded if GDP demand, while the export orders were flat. The Growth increases because they can . Economic Calendar on Bloomberg also shows that the unemployment rate increased one tenth, which is higher Real GDP than expected. 10 If the Federal Reserve decides to have a rate hike in the 5 next 6 months, the unemployment and inflation level are 0 going to deviate from its monetary policy goals. In the 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 % Growth -5 long run, the majority of the Federal Open Market Committee (FOMC) participants are expecting to see an -10 increasing trend of the Federal Funds Rate of 2.2% and Quarterly Annual, Average 3.0% at the midpoints of 2018 and 20194.

Source: St. Louis Fed @ 2017 Inflation The above graph shows that U.S. GDP growth has leveled The Federal Reserve’s objective in conducting monetary off in the past few years after it fell in 2008. Historical policy is to achieve the inflation target of 2%. This is an evidence suggests that the Consumer Staples sector has important economic factor because the Fed is constantly been benefiting from this consistency. According to “The monitoring the price level of consumer spending. The Conference Board Economic Forecast for the U.S. FOMC Committee judges the inflation level by measuring Economy,” the U.S. GDP is expected to have a 2.6% the Personal Consumption Expenditure (PCE) growth in the second half of 20171. In addition, the index. Higher inflation rates could be beneficial for the Economist Intelligence Unit (EIU) forecasts a 2.1% and Consumer Staples Sector. A higher price level would 2.2% growth in 2018 and 20192. Business investment bring more revenue to the companies in this gained momentum last quarter, which brings investment sector. Historical data shows that the consumption level growth in line with higher levels of business confidence for Coty’s sales did not get affected by higher inflation. that have prevailed since the end of 2016. Equipment spending signals upward momentum for industrial

1 According to the Economist Intelligence Unit (EIU), the that will raise unemployment rate is pressure to increase U.S. is expected to achieve an overall inflation level of wages, which could strain the number of employees a 1.9% in 2017. In 2018 and 2019, the U.S. are predicted business can keep on. The labor force participation rate to reach an inflation rate of 2.0% and 2.2%, is expected to drop, we are forecasting a 62.7% labor respectively5. EIU agrees with the expectation of the force participation rate in the next 6 months and 61.9% FOMC in which the inflation would rise in the medium by 2020. High skill sets and use of automation in term of 2017. In 2018, the consumer price inflation is manufacturing jobs are pushing people out of the labor expected to continue an upward trend but at a slowing force, whereas before workers could find plenty of jobs pace. without the need of higher education.

US Core PCE Capital Market Outlook 3 We think right now is a good time to invest in this area. 2.5 According to the forecast, the U.S. GDP is going to grow 2 in an increasing trend, which leads to a stimulation in the 1.5 U.S. consumer market. 1 0.5 In the short term (6 months), the Fed will most likely not 0 raise the interest rate due to the economic outlook that Annual YoY % Change % YoY Annual 2000 2002 2004 2006 2008 2010 2012 2014 2016 it is not affordable to have such a rate hike. If they don't

Source: Bloomberg @ 2017 raise the interest rate, the unemployment rate should Unemployment and Labor Force Participation Rate decrease and inflation level should climb back up. These The unemployment rate is a measure of how many consequences would benefit the Consumer Staples eligible people are not working in the U.S. The labor force sector due to the potential increase in revenue. participation rate (LFPR) is a measure of how many persons are working or looking for work in the U.S. Both After looking at current and historical data we have of these measures are used by economists to judge the concluded that the consumer staples market will state of the American job market, but LFPR is preferred. outperform the rest of the market. Historically over the As seen by in the graph below, Consumer Staples past 10 years, the consumer staples sector has performance is negatively correlated to LFPR. We outperformed the market by 35%. As we discussed generally think that people fall back on Consumer Staples above, the outlook for consumer staples is great due to in times of hardships because they can’t afford as much the current conditions but we feel that there could be discretionary spending (cooking at home vs. eating out). growth above what we expect because of consumer demand, which is hard to predict. Labor Force Participation Rate v S&P500 Consumer Staples Price In the short term, we feel that the consumer staples 800 68 industry will outperform the market by 3.5%. We feel 600 66 that the short-term outlook is going to outperform $ 400 64 % because people have lots of extra income to spend on food and beverages. 200 62

0 60 2007 2009 2011 2013 2015 2017 In the long term, we feel that the consumer staples industry will continue to outperform the market by S&P 500 Consumer Staples Price LFPR around 10%. We chose this percent due to the historic

Source: Bureau of Labor Statistice @ 2017 performance of the consumer staples industry to the S&P Dow Jones Indices @ 2017 market. We are predicting an unemployment rate of 4.5% for the next six months, but we think it will rise to 5% in the next three years. Unemployment usually increases under Republican held presidencies and we expect this trend to 43 continue in the current administration . Another factor

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Markets and Competition The personal product industry currently consists of Industry Analysis roughly 750 companies. These companies generate annual revenue of more than $40 billion every year with Industry Description consistent growth. The 50 biggest companies in this The Personal Products or cosmetics industry can be industry contribute 70% of the total revenue14. However, described as an industry that supplies personal hygiene there are some small companies competing with the big items and make-up13. Every single day every household ones that specifically focus on a minor part of the market around the world uses some sort of personal product. or on specialized products. Most consumers have demand for these products no matter what the economic outlook might be at the time. There are several industry leaders like Kimberly-Clark, The only fluctuations you find are demand for products Johnson & Johnson, Estee Lauder, Coty, Alberto-Culver, in a certain price range. Avon and L'Oreal. These companies contribute the major growth to the market every year21. Over the past couple years the personal product industry has added 237 billion to the US GDP and created The following products generate the revenue of the approximately 180,000 jobs17. This industry continues to entire personal product industry. The first type is grow as the typical target consumer changes from just makeup, deodorant and nail products, which generates women to also include men. 33% of industry revenue. The second type is hair care products, which generates 25% of the revenue42. The Recent Developments and Industry Trends next type of personal products is hand cream and lotions The demand for men’s care products has grown very which contributes 21%42. The remaining part of revenue quickly in the past couple years with the acceptance of is generated by perfumes, mouthwashes, shaving the use of products for men. There has been a shift to preparations and other products. where men are now expected to be clean and put Personal Product Types together just as much as women are. Men shave, on average, around 5 times a week and every time a man Makeup, deodorant, and nail products shaves he uses personal care products. They are also 21% much more conscious about their appearance and have Hair care products 33% started using products that are typically aimed towards females to improve appearance or skin health. The Hand cream and lotions market for men’s personal care products will reach 46.3 21% 19 Perfumes, mouthwashes, billion by 2020 due to many market drivers . shaving preparations, and 25% other products Skincare has always had a pretty steady demand but for a couple years there has been an increase in the Source: business.com @ 2017 awareness of ingredients that are not good for your skin. According to Porter’s 5-Forces Analysis, the two major There has been an increase of sales of products that are forces affecting the industry are competitive rivalry and made of natural ingredients that will increase the health threat of substitution. The cosmetic industry is filled with of your skin and not clog pores. The average beauty several major competitors, which hold the most of the regimen consists of around 27 products, a number that market share. Every single of them is competitive and has doubled over the last decade22. Consumers are no provide variety of products and services at a similar longer satisfied with a single “one-size-fits-all” product. quality. On the other hand, because of the existence of They now need a cleanser, toner, face mask, essential oil, similar products in cosmetic industry, it is easier for age regenerator, skin-specific moisturizer, dark spot customers to find a different product with the similar corrector, etc. This market continues to grow and is function. There is no cost for customers to switch from being fed by the beauty blogger craze that is happening to the others, thus the threat of substitutes is another on social media and YouTube channels. factor to shift the industry21.

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Financial and Operating Market The Personal Products industry has a fairly spread market 1 year prices concentration - where Estee Lauder has the largest share 150 40 in the market at 13.4%. Since several of the major 30 cosmetic firms own more than one brand, we think that 100 there are opportunities for changes in leaders in the 20 EL ($) 50 market. Companies like L’Oreal and Coty could very well 10

overtake Estee Lauder in market share. 0 0 AVP REV, ($) COTY, Cosmetic & Beauty Products Manufacturing Market Share Nov Jan Mar May Jul Sep Nov Estee Lauder Inc. EL COTY REV AVP 13% L'Oreal USA Inc. Source: Yahoo Finance @ 2017 6% Mary Kay Inc. Key Factors Driving the Industry 5% Coty Inc. Per Capita Disposable Income 5% 63% 4% Unilever Personal Products are considered to be discretionary, 4% Revlon Inc. and people tend to increase their consumption for this category when per capita disposable incomes are high; Other (including Procter & Gamble Company) and vice versa. Despite the upward pressure for wage Source: IBISWorld @ 2017 growth throughout 2017, the lower unemployment rate There has been an upward trend of sales in the cosmetic and federal funds rate could potentially increase the industry in the past three years. While Estee Lauder, disposable income level. According to IBIS World, per L’Oreal, and Revlon both showed positive sales growth in capita disposable income is expected to grow 2.20% this the last year, Coty surpassed them with a 75% increase year21. in sales between 2016 and 2017. A large portion of this growth was due to the acquisition of P&G Beauty in Number of Adults Aged 20 to 64 2016, but we are predicting that sales will continue to The number of millennial women plays an indispensable rise. role in the cosmetic industry, because this particular group has contributed the most share of revenue in the Sales past. An expansion of the ages 20 to 64 group would 15,000,000 boost the revenue of this industry. According to IBIS 10,000,000 World, this age group has started to slow by an annualized rate of 0.2% from 2012 to 2017. However, 5,000,000 over the next five years, the number of adults aged 20 to 0 64 is anticipated to increase21. 2014 2015 2016

Dollars thousands in Dollars COTY EL REV AVP Key Investment Positives and Negatives Positives Source: Yahoo Finance @ 2017 There are several expanding opportunities in the Personal products firms have had a great year of stock industry. For example, while the traditional cosmetic returns - better than the market as a whole. Estee Lauder product market is becoming saturated, eco-friendly showed a very large return at 61.77%, but Coty and, even cosmetic products are becoming more popular as more more so Revlon both had majorly negative returns. people are more concerned with environmental issues. This could be a potential growth driver for Coty.

Per capita disposable income is on an increasing trend. In addition, with the possibility of the inflation level increase in the not too distant future, the cosmetic industry could benefit from the overall price level increase in the consumer staples industry.

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Negatives Life Cycle As many people have become more health conscious, The life cycle that Coty is currently in is growth due to the and most of the makeup and beauty items have been fact that they are still acquiring other companies and proven to be harmful to the human body. Consumers increasing in size. The cosmetic industry is at a mature might be more sensitive about what products they use. stage but because of the movement of consumer demand new opportunities present themselves According to IBIS World, while many manufactures have constantly29. the incentive to expand into natural products, there is no Food and Drug Administration (FDA) regulations that control the use of the word “organic” on product labels. Financial Summary Standardization needs to be done to overcome this In Q4 2017, Coty’s revenues more than doubled from Q4 issue21. 2016. However, net income showed a significant loss at - $304.8 million. The 2017 fiscal year data is also showing a net loss at -$422.2 million. Their consumer beauty Company Specific Analysis segment brought in the most revenue in 2017, at $3688.2 million (a 63% increase from last year). Much of Overview and Business Description this can be explained by the acquisition of P&G Beauty in Coty Inc. is a multifaceted business that focuses on late 2016. P&G owns a lot of consumer beauty brands, Luxury, Consumer, and Professional Beauty. There are 75 like Head & Shoulders, Secret, and Covergirl, but they brands in Coty’s portfolio and these brands include also own Gucci and Dolce & Gabbana beauty. The Covergirl, Rimmel, Sally Hansen, Clairol, Gucci, Calvin acquisition was a big driver behind the debt that Coty Klein Fragrances, and OPI26. Consumer Beauty focuses on accumulated in the last year, which is a very expensive color cosmetics, retail hair coloring and styling products, way to drive the massive sales increase. body care and mass fragrances that are affordable to the everyday citizen. Luxury beauty focuses on high-quality Product Line and New Products fragrances, premium skincare and premium cosmetics. Coty has released many new products this year showing Professional beauty focuses on hair and nail care for that they are true to their promise of product innovation. salon owners and salon professionals. Among the new products was a clear brow gel, waterproof mascara, liquid gel eyeliner, anti-fatigue Coty 2017 Revenue Decomposition foundation and concealer, setting spray, and a contour palette all from Rimmel. They are clearly moving on the 18% trend of women spending more time on their makeup. 34% Luxury Consumer Beauty Market for the Company’s Products The market for Coty’s products is very wide due to the Professional Beauty various facets that they have. For their consumer beauty 48% products the market is middle to lower-income males and females between the ages of 20-35. This is due to the

Source: Coty 10-K @ 2017 price range and store availability where these products Corporate Strategy are found. They are priced affordably for someone who Coty’s corporate strategy is to celebrate and liberate the doesn’t have a lot of disposable income or a steady job. diversity of consumers’ beauty by providing products Their Luxury items are in the market of upper-income that are at all price ranges and qualities. They have a males and females between the ages of 35-45. The price global distribution network that allows for easy range and store availability of these products is directed accessibility and convenience. They also focus on toward adults with steady paying jobs and extra innovation through research and development of new disposable income. The Professional Beauty product top of the line products26. lines are in the market of professional beauty stylists and businesses.

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Marketing Strategy and Customer Support Suppliers and Raw Materials The marketing strategy of Coty is to create an individual Raw materials consist mainly of essential oils (sourced trusted brand for each product line. All 75 brands have from fragrance houses). Alcohols and specialty chemicals their own packaging, image, and personality to create a are also raw material components for Coty. All raw unique experience for each one to target a specific materials come from third parties, and no party supplies consumer. Every brand's advertising strategy is different more than 10% of the total raw material input - which to fit the needs of the products and consumers. means that Coty is not reliant on any one supplier. That being said, materials costs are relatively small compared Significant Customers to the costs associated with shipping and marketing. The most significant customer for Coty is Wal-Mart accounting for 7% of their total sales. Other than that Competition their biggest customers sales do not amount to a large Coty Inc. is a leading beauty and cosmetics company that number. Their consumer beauty products are sold to has competitors such as Estée Lauder, L’Oréal, and Avon. drug stores, mid-level department stores, and According to According to an Ernst & Young report, the supermarkets. Perfumeries, upscale retailers, and duty long-term expected performance for beauty industry free shops buy their Luxury products. As for their remains positive. More specifically, the globalization Professional products, they go straight to salons and nail makes the potential global market available in the near and hair care professionals. Also, all of their products are future. Also, the report states that the global population available for online purchase through various websites from emerging markets is expected to increase the global made for each separate brand. market size by 50%. The competition remains intense because of the large number of substitutes and constant Manufacturing Process changes of consumers’ preferences. 82% of Coty’s products were manufactured by the company, mostly in the U.S., Europe, and Brazil. Animal Sales Compound Annual Growth testing, unless required by law, is not implemented in the Sales Compound Annual Growth (CAGR) is calculated by manufacturing of any Coty product. Cruelty-free beauty taking the geometric mean of the growth in sales, is a growing concern among consumers and can affect specifically for five years in the graph below. Revenue is which brands a buyer will support. 72% of Americans the very first line item on the income statement because believe that testing beauty products on animals is it drives net income and the stock price. inhumane. 5 year sales CAGR Distribution 15.00% The global distribution network is constantly changing to 10.00% meet customer demand and match expected service levels. Coty products are sold in over 130 countries. 5.00% Consumer beauty products are sold mostly in 0.00% COTY EL REV AVP supermarkets, drugstores, mid-level department stores, -5.00% and the like. Placing Coty’s more affordable brands in -10.00% retailers like Target, Walgreens, and Ulta make the -15.00% products really accessible to the demographic they are trying to reach. Luxury products are sold in upscale Source: Company 10-Ks @ 2017 retailers like perfumeries, department stores, and duty- Coty and Revlon have seen very similar, positive sales free shops. The professional division sells directly to nail growth (both close to 13%), although Coty’s growth is and hair salons and professionals. All segments utilize e- partially explained by the acquisition of P&G beauty commerce distribution as well. Wal-Mart is the top which is an expensive way to obtain growth. retailer of Coty products, with 7% of net revenues coming from Wal-Mart. Inventory Turnover The number of times a company can turnover its inventory is especially important in the cosmetic and beauty industry because of the constant change in

6 trends. Since trends are always coming in and going out employ representatives to sell within their individual (with the push of social media), “old news” products communities. need to move off the shelves as soon as possible. Makeup and skincare also have a shelf-life, so it’s Porter’s Five Forces Analysis important that products sell before they expire. Threat of competitors: Moderate-High Coty operates in an intense competitive market so that Inventory Turnover long-term profitability is harmed by the competitive 4 pricing mechanisms. Besides, Coty has to face the competition with Estée Lauder, L’Oréal, and Avon all over 3 the world. Also, these competitors will offer specific products priced similarly targeting Coty globally. 2

1 Threat of New Entrants: Medium New Entrants are always a big threat for Personal 0 Products industry. The new entrants which carry out COTY EL REV AVP newly innovated products can easily take a part of Source: Company 10-Ks @ 2017 market share. Unless the new company featured new Avon sells off their inventory almost four times a period technology introduce something truly innovative and and Coty’s inventory management is not far behind with differentiated, it is hard for the new entrants to exist in an inventory turnover of 2.61. Avon’s high inventory the market21. turnover is partially due to comparatively low inventory. Threat of Substitutes: Moderate-High Gross Margin For personal product industry specifically, there is a Gross margin is equal to gross profit as a percentage of variety choices of products with similar functions and sales and it shows us how well the company is managing prices. However, a well-branded product is hard to be its operating costs compared to the sales level it replaced unless that replacement includes new maintains. It can explain a lot about whether a company technology that offers improved results. More is a price-maker or price-taker because a high gross specifically, the technology makes it easier to reverse margin means sales were high and COGS were low. some of the cosmetics and fragrances, thus cheaper personal product’s demand is therefore increased13.

Gross Margin Bargaining power of suppliers: Medium 150.00% Coty purchases raw material from several of suppliers, though it has to purchase specific chemicals for 100.00% fragrances from specific suppliers. The overall impact of 50.00% higher supplier bargaining power is that it lowers the overall profitability of Personal Products14. 0.00% COTY EL REV AVP -50.00% Bargaining power of buyers: High The sale of Coty is mostly relied on the large retail buyers. Gross Margin Gross Margin % Change Therefore, any changes of the customer base in the Source: Company 10-Ks @ 2017 department stores can seriously affect the profitability of The chart would suggest that Coty, Estee Lauder, and Coty. Moreover, the buyers will always seek for better Revlon have similar ways to effectively manage their deals and offers. Considering the various substitutes in costs and that they have similar pricing power. The the market, Coty has to settle with the discounted deals beauty industry is able to price their products with huge from customers21. profit margins because they are not only a “nece ssary” good, but are also extremely valued by Other Topics consumers. Avon makes less of a gross margin because The globalization of the entire Personal Products is their products are not only sold in retailers, but they also developing in a rapid pace. Also, according to the report,

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Coty should face a significant growth in global market in SWOT Analysis the near future. However, this will bring more Strengths competition to Coty with the major competitors in the Organizational Structure: emerging markets globally17. Coty constantly monitor how, where and why customers shop for a specific products. After its acquisition with Furthermore, Coty is using the multi-segment P&G Beauty Business, the business is reorganized to manufacturing in various location all over the world. three divisions: Luxury Consumer Beauty and Besides, Coty sells its products through a multichannel Professional beauty. Each division is set up a full end-to- distribution strategy across several price points in end responsibility to ensure the quality of customers’ prestige and mass market channels of distribution. The beauty experience. The company is consistently company sells its products through a variety of retailers. optimizing product categories and channel to better satisfy customers. According to Cohen, “the FDA governs the laws and regulations relating to the manufacturing, labeling and Business Strategy: marketing of products”. Because of the close contact Coty continues to enhance the portfolio and better the between personal products and human bodies, the company brand. Starting from October 2017, Coty will health concerns and sensitivity from customers drive the be partnering with Burberry to develop its luxury government regulations to a possibly more serious and division. In addition, the company would consistently in strict level in the near future21. response to competitors’ new products. Integrating with P&G Beauty Business is going to diversify the company’s This industry is regulated by the Research Institute for product portfolio. In fact, company beat the expected Fragrance Materials (RIFM), which is aimed to ensure the earning in Q3 of 2017, $0.10/share vs $0.07/share safety level of materials of perfume and fragrance. The consensus, which signals a recovery of major losses RIFM conducts toxicity tests, and allergy and photo occurred last year. toxicity testing of raw materials that are selected by the Scientific Advisory Board. There are further tests for the Weaknesses results to ensure that it follow the rules of International Operating struggles: Fragrance Association (IFRA)28. The company experienced an operating loss of $279 million in 2016. The Main struggle comes from the Catalysts for Growth and Change Consumer Beauty segment. The reduction of brands The catalysts for growth and change for Coty are shifts in show on shelf space, and decline in distribution have a consumer demand, economic state, trends, perceived negative impact on this business segment. Additionally, value, and new products for other companies. Consumer the company disclose a significant high actual trade demand is always changing with the trends that are inventory compare to the expected trade inventory. made by beauty bloggers and influencers like celebrities. Coty must come up with new products constantly to Opportunities keep up with these changes. The economic state changes Economic Environment: the tier of makeup that consumers buy from, a healthy With the fact that cosmetics is considered to be economy means more people will buy luxury and a poor discretionary, people tend to increase their consumption economy more people might buy consumer beauty. The for this category when per capita disposable incomes are higher the perceived value of a product the more likely it high; and vice versa. The low unemployment rate and will be purchased by the consumer so Coty must find a interest rate will encourage the increased of way to make their products with the highest possible consumption. We expect a 2.20% increase of per capita value. When other companies come out with new disposable income this year. As Coty acquires long-term products then Coty must be competitive and come out global license right from Burberry and P&G, and with something similar so that the consumers feel that diversifying its product, the company will benefit from their favorite brand is keeping up with the latest trends. the current economic environment.

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Sustainability: aggressive business activities resulted an operating loss There are several expanding opportunities in the in 2016, these effort make Coty a strong player in the industry. For example, while the traditional cosmetic industry. Coty resulted in positive earnings so far in 2017. product market is becoming saturated, eco-friendly The key assumptions we used in our financial models are cosmetic products are becoming more popular as more revenue forecasts, synergies achieved through the people are more concerned with environmental acquisition of P&G Beauty Business, dividends per share issues. On August 12, 2017, P&G announced the payouts, WACC estimation, and our continuing value company plans to use eco-friendly sugarcane-derived (CV) growth assumption. plastic to package select beauty products. With the fact that Coty is integrating with the P&G Beauty Business, Discounted Cash Flow (DCF) and Economic Profit (EP) eco-friendly cosmetic products might evolve within Model Coty’s portfolio. The intrinsic value of Coty Inc. calculated in the DCF and EP model is $21.47. With the current price of the stock at $16.31 in compared to our valuation range $20 - $22, Threats results in a premium between 22.6% - 34.9% over its Industry Competition: market price. This premium mainly comes from the the The Perfume and Fragrance Manufacturing industry is CV growth of the company, which results a high value of highly competitive due to the entry barrier is operating assets. The DCF Model and EP Model are moderate. Industry competitors are competing base of superior for Coty than the DDM and Relative PE valuation price, quality, product innovation and customer services. model because both models reflect the continuing values Price is one of the most important factor because that the invested capital could bring to the firm in the downstream customers could choose one over the other future. due to the price difference. And yet, Coty does not have any leverage to compete with the middle-low tier Dividend Discount Model (DDM) brands, because of the operating struggles it currently Coty has decreased its dividend payout since 2016 and experiences. the company strategically searched potential acquisitions and partnership to grow its revenue and Conclusion Paragraph business. We believe investors who invested in the With the organizational structure, acquisition of major company are interested in the potential profit at this luxury consumer beauty brands, and showing positive early stage of investment and the potential for the operating earnings, Coty has overcome the major future. We believe that Coty will remain a growing operating losses that occurred last year. Going forward, company status and would continue to pay a low Coty is going to utilize the advantage of owning some dividend in the next five years, until it reaches the CV in major premium brands, and thereafter make the firm the year of 2022. In all, DDM is not a very good become more competitive in the industry. representation of Coty’s intrinsic value because it is only considering the dividend payout.

Valuation Analysis Relative Price to Earnings (P/E) Coty had a significant net loss of 422.2 million in 2016 Overview and the loss exceeds the combination of the net income Our group is issuing a BUY recommendation on Coty’s the firm has generated in 2014 and 2015. The company stock. According to the result of our valuation models, is expected to have a positive net income from the alongside with several key assumptions, the targeted benefit of last years acquisition of 53.09 million. The net stock price should be $20.00 to $22.00. This price range loss is the directed outcome of the recent acquisition, comes from a partially adjusted present value of the and the earning per share data from 2017 is not an stock as $21.47/share through our DCF/EP model. Coty accurate representation of Coty’s profitability, in which has been able to weather the competitive nature of the resulted the P/E model is not an authentic model for our industry. The firm continues to enhance the business valuation. portfolio by acquiring P&G Beauty Business and partnering with Burberry. Although some of the

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Company Name Share Price P/E 18 P/E 19 implement its plan through realizing approximately $750 Estee Lauder $ 124.61 31.23 28.07 millions of synergies driven by cost, procurement, supply International Flavours chain and selling, general, and administrative savings and Fragrances $ 146.77 25.53 23.52 through fiscal 2020. The cumulative synergies of Avon $ 1.92 16.00 6.86 approximately 20% in fiscal 2017, approximately 50% in Coty Inc. $ 16.31 319.90 38.50 fiscal 2018, and approximately 80% through fiscal 2019. Source: Yahoo Finance @ 2017 Weighted Average Cost of Capital Forecast Summary Cost of Equity We thoughtfully consider Coty could overcome the In the calculation of cost of equity, we used 2.79% risk- operating loss occurred last year. Coty will achieve an free rate which is the yield of 30-year treasury traded on average of 3.75% in the next four years through the November 10, 2017. market premium because we felt acquisition of P&G Beauty and exclusive long-term that the best value is the difference of the geometric license rights for Burberry Limit, before it reached the its historical average for both the S&P 500 return and the continuing value year in 2022, with a constant growth of Treasury bond rate between 1928 and 2016. Lastly. after 2.00%. We concluded a 2.00% CV Growth Rate examined the risk factors that is used to calculate the assumption from our expectation toward several of the beta and comparing the Coty to other major firms in the economic factors. As a part of the nature of in the industry, we decided to uses a 0.80 beta instead of a 0.16 consumer staple company, the CV of Coty tend to align beta suggested by Bloomberg. with the future inflation level and GDP growth. An important note to our evaluation model is that Restricted Cost of Debt Cash remains constant. In November 2016, the FASB Cost of debt is calculated using pre-tax cost of debt and amended the classification and presentation of the marginal tax rate. We used 5.00% for our pre-tax cost restricted cash on the statement of cash flows: the of debt as it is the yield for a Esate bond maturing on amounts generally described as restricted cash should be 3/15/2047. Our marginal tax rate of 29.18% was found included with cash and cash equivalents. The company by adding the federal income tax rate, state income adopted this guidance in Q2 of 2017, and did not expect taxes, and foreign rate differences and valuation rate to make changes to the restricted cash account. allowances and then took a 5 year average of these rates. Using these two inputs we concluded that our cost of Key Assumptions debt is 3.54%. Revenue Forecasts Coty’s revenue stream can be broken down into three WACC main segments: Luxury, Consumer Beauty, Professional After calculating the value of equity by multiplying the Beauty. The largest revenue source is Consumer share price by the shares outstanding and finding the Beauty. In the past, these segments perform in a value of debt by adding the book value of short and long- consistent manner, in which they tend to increase and term debt to the present value of operating leases we decrease together. With the acquisition of P&G Beauty found the weights of equity and debt. We then took each and long-term license rights for Burberry Limit, Coty weight and multiplied it by the corresponding cost and could further increase its Consumer Beauty and Luxury then added them together. This gave us a value of 5.24% segments’ revenue. for our WACC.

Synergies through Acquisition of P&G Beauty Business Coty finished its acquisition with P&G Beauty Business on October 1, 2016 to further strengthen the Company’s Sensitivity Analysis position in the global beauty industry. The purchase price was $11,570.4 millions and consisted of $9628.6 Beta vs. Risk Premium millions of total equity and $1941.8 of assumed Changing the Beta and Risk Premium, the main debt. The market reacted positively with a 1.23% components in the calculation of WACC, shows us just increase on Coty’s stock and 0.87% increase on The how sensitive the stock price is to the Cost of Capital. Procter & Gamble Company. Coty continues to While keeping the other variables we used to calculate WACC constant, a 0.1% increase in the risk premium

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changes our stock price from $21.47 to $20.83 while a 0.5 increase in Beta changes our stock price from $21.47 to $19.67. A small change in the assumptions that we Important Disclaimer made have a large affect in the Intrinsic Stock Price that we calculate. This report was created by students enrolled in the Applied Equity Valuation (FIN:4250) class at the WACC vs. CV NOPLAT University of Iowa. The report was originally created to By evaluating the WACC and the CV NOPLAT we are offer an internal investment recommendation for the showing the sensitivity of our stock price to changes in University of Iowa Krause Fund and its advisory board. the cost of capital and revenue growth. We assume our The report also provides potential employers and other CV NOPLAT to be the same as our CV growth of revenue interested parties an example of the students’ skills, and therefore increasing this increases revenues. knowledge and abilities. Members of the Krause Fund Increasing WACC decreases our stock price because if the are not registered investment advisors, brokers or cost of capital increases, the amount of money it takes to officially licensed financial professionals. The investment take on new projects also increases. A .05% increase in advice contained in this report does not represent an WACC takes our intrinsic price from $21.47 to $20.77, offer or solicitation to buy or sell any of the securities while a .25% increase of CV NOPLAT growth takes our mentioned. Unless otherwise noted, facts and figures price from $21.47 to $23.76. included in this report are from publicly available sources. This report is not a complete compilation of COGS (% of Sales) vs. SG&A (% of Sales) data, and its accuracy is not guaranteed. From time to The largest expenses that Coty pays are Cost of goods time, the University of Iowa, its faculty, staff, students, sold (COGS) and selling, general and administrative or the Krause Fund may hold a financial interest in the (SG&A) and by increasing these as a percent of sales companies mentioned in this report. directly affects operating income. Coty has just acquired P&G Beauty and they are going to realize synergies in the several years to come. A .05% increase in COGS takes our intrinsic price from $21.47 to $20.02, while a 1% increase of SG&A takes our price from $21.47 to $17.55.

Pre-Tax Cost of Debt vs. Marginal Tax Rate Tax rates are projected to decrease with the new presidency and we were interested to find out how sensitive our stock price is to the marginal tax rate and the pre-tax cost of debt. A .5% decrease in the marginal tax rate takes our intrinsic price from $21.47 to $20.02, while a .5% decrease of Pre-Tax Cost of Debt takes our price from $21.47 to $17.55.

Risk-Free Rate vs. CV ROIC Growth Interest rates affects the WACC and therefore affect the CV ROIC Growth. Testing the sensitivity of these two assumptions shows us how our price might be affected by a predicted increase in the Risk-Free Rate. A .01% increase in the risk-free rate takes our intrinsic price from $21.47 to $21.39, while a .5% increase of the CV ROIC Growth takes our price from $21.47 to $22.89.

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Works Cited

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The Next Great Bull Market In Grains Will Come filing/AnnualReport/2017/6/30/t.aspx?t=%3ACOTY&ft=10K&d=243809ed34b284 And Now Is The Time To Prepare. Retrieved September 05, 2017, from becf4d3e185c2b1295 https://seekingalpha.com/article/4031727-next-great-bull-market-grains-will- 35. Fool, M. (2017, November 09). Why Coty Inc. Stock Jumped 21% Thursday. come-now-time-prepare Retrieved November 09, 2017, from https://finance.yahoo.com/news/why-coty-inc- 7. US Average Farm Price Received. (2017, August 31). Retrieved September 05, stock-jumped172100268.html 2017, from 36. Coty Inc. Reports Fiscal 2017 Fourth Quarter and Full Year Results. (2017, August http://www.farmdoc.illinois.edu/manage/uspricehistory/us_price_history.html 22). Retrieved November 10, 2017, from 8. DePersio, G. (2015, June 15). What is the key difference between the participation http://www.businesswire.com/news/home/20170822005314/en/CotyReports-Fiscal- 2017-Fourth-Quarter-Full rate and the unemployment rate? Retrieved September 05, 2017, from 37. The University of Iowa Libraries. (n.d.). Retrieved November 10, 2017, from http://www.investopedia.com/ask/answers/061515/what-key-difference- http://clients1.ibisworld.com.proxy.lib.uiowa.edu/reports/us/industry/currntperform between-participation-rate-and-unemployment-rate.asp ance.aspx?entid=4242 9. United States Unemployment Rate Forecast. (2017, August). Retrieved September 05, 2017, from https://tradingeconomics.com/united-states/unemployment- 38. UPDATE 1-P&G plans eco-friendly packages for beauty products. (2010, August rate/forecast 12). Retrieved November 10, 2017, from 10. J. M., X. N., & J. T. (2017, January 13). CBO's Long-Term Projections of Labor Force http://www.reuters.com/article/procterandgamble/update-1-pg-plans-ecofriendly- Participation. Retrieved September 05, 2017, from packages-for-beauty-products-idUSN129778320100812 https://www.cbo.gov/publication/52365 39. Avon Products, Inc. (2017). Form 10-K 2017. Retrieved from 11. 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Study Finds Personal Care Products Industry Major Contributor to U.S. Economy - Industry supports diverse workforce, research and development, corporate social responsibility and plays important role on global stage. Retrieved September 08, 2017, from http://www.personalcarecouncil.org/newsroom/2016037 18. JBS SA ADR EACH REP 2 ORD: OTCMKTS:JBSAY quotes & news - Google Finance. Retrieved September 11, 2017, from https://www.google.com/finance?q=OTCMKTS%3AJBSAY&ei=R-- yWfiTFofKmAG0p7WADg 19. Men's Grooming Products Market Trends. (2015, March). Retrieved September 08, 2017, from http://www.strategyr.com/MarketResearch/Mens_Grooming_Products_Market_T rends.asp 20. Revlon Inc: NYSE:REV quotes & news - Google Finance. Retrieved September 11, 2017, from https://www.google.com/finance?q=rev&ei=7722WZKyM8HAjAGnzqG4Dg 21. Beauty, Cosmetics & Fragrance Stores in the US. (n.d.). Retrieved September 9, 2017, from http://clients1.ibisworld.com.proxy.lib.uiowa.edu/reports/us/industry/default.asp x?entid=1055 22. Personal Care Products. (n.d.). Retrieved September 12, 2017, from http://www.vault.com/industries-professions/industries/personal-care- products.aspx 23. EL : Summary for Estee Lauder Companies, Inc. Retrieved September 11, 2017, from https://finance.yahoo.com/quote/EL?p=EL 24. COTY : Summary for Coty Inc. Class A. Retrieved September 12, 2017, from https://finance.yahoo.com/quote/COTY?p=COTY 25. Fool, M. (2017, November 09). Why Coty Inc. Stock Jumped 21% Thursday. Retrieved November 09, 2017, from https://finance.yahoo.com/news/why-coty- inc-stock-jumped-172100268.html 26. Coty Inc. (2017). Form 10-K 2017. Retrieved from http://investors.coty.com/phoenix.zhtml?c=251569&p=irol-presentations 27. Coty Inc. (2017). Q4 Earnings Release 2017. Retrieved from http://investors.coty.com/phoenix.zhtml?c=251569&p=irol-presentations 28. A. (2011, December 28). More Than a Makeup Trend: New Survey Shows 72 percent of Americans Oppose Testing Cosmetics Products on Animals. Retrieved September 18, 2017, from https://www.pcrm.org/research/animaltestalt/cosmetics/americans-oppose- testing-cosmetics-on-animals 29. Coty Completes Merger With P&G Specialty Beauty Business. (2017, May 17). Retrieved September 19, 2017, from https://www.coty.com/news/coty-completes- merger-pg-specialty-beauty-business Coty Inc. Key Assumptions of Valuation Model

Ticker Symbol COTY Current Share Price $16.31 Current Model Date 11/10/2017 FY End (month/day) 6/30/2017

Beta 0.8 Risk-Free Rate 2.79% Equity Risk Premium 4.65% CV Growth of NOPLAT 2.00% CV Growth of EPS -4.05% CV ROIC Growth 12.71% Current Dividend Yield 0.00% Marginal Tax Rate 29.18% Effective Tax Rate 39.40% Coty Inc. Revenue Decomposition (In Millions) Fiscal Years Ending 06/30/2017 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022 Net Revenues by Segment Luxury 1938.3 1836.6 2566.6 2677.6 2811.5 2881.8 2953.8 3012.9 Year-Over-Year Growth -5.2% 39.7% 4.3% 5.0% 2.5% 2.5% 2.0% Consumer Beauty 2185.4 2262.5 3688.2 3855.8 4048.5 4149.8 4253.5 4338.6 Year-Over-Year Growth 3.5% 63.0% 4.5% 5.0% 2.5% 2.5% 2.0% Professional Beauty 271.5 250.0 1395.5 1499.5 1574.4 1613.8 1654.1 1687.2 Year-Over-Year Growth -7.9% 458.2% 7.4% 5.0% 2.5% 2.5% 2.0% Total Sales 4395.2 4349.1 7650.3 8032.8 8434.5 8645.3 8861.5 9038.7 Year-Over-Year Growth -3.4% -1.0% 75.9% 5.0% 5.0% 2.5% 2.5% 2.0%

Net Revenues by Geographic Regions North America 1499.7 1413.0 2506.9 2570.5 2699.0 2766.5 2835.7 2892.4 Year-Over-Year Growth -5.8% 77.4% 2.5% 5.0% 2.5% 2.5% 2.0% Europe 1961.6 1924.6 3325.7 3494.3 3669.0 3760.7 3854.7 3931.8 Year-Over-Year Growth -1.9% 72.8% 5.1% 5.0% 2.5% 2.5% 2.0% ALMEA 933.9 1011.5 1817.7 1968.0 2066.4 2118.1 2171.1 2214.5 Year-Over-Year Growth 8.3% 79.7% 8.3% 5.0% 2.5% 2.5% 2.0% Total 4395.2 4349.1 7650.3 8032.8 8434.5 8645.3 8861.5 9038.7 Year-Over-Year Growth -3.4% -1.0% 75.9% 5.0% 5.0% 2.5% 2.5% 2.0% Coty Inc. Income Statement (In Millions) Fiscal Years Ending 06/30/2017 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022 Net revenues 4395.20 4349.10 7650.30 8032.82 8434.46 8645.32 8861.45 9038.68 Cost of sales 1600.80 1593.50 2748.50 2886.19 3030.50 3106.26 3183.92 3247.60 Depreciation 156.20 152.50 280.00 293.14 321.24 347.59 372.73 397.08 Gross profit 2638.20 2603.10 4621.80 4853.48 5082.72 5191.46 5304.80 5394.00 Selling, general and administrative expenses 2066.10 2027.80 4060.00 3938.20 3741.29 3479.40 3479.40 3479.40 Amortization expense 74.70 79.50 275.10 328.85 316.02 303.68 291.83 280.44 Restructuring costs 75.40 86.90 372.20 32.00 32.00 32.00 32.00 32.00 Acquisition-related costs 34.10 174.00 355.40 Asset impairment charges 5.50 Gain on sale of assets (7.20) (24.80) (3.10) Operating (loss) income 395.10 254.20 (437.80) 554.43 993.41 1376.38 1501.58 1602.16 Interest expense, net 73.00 81.90 218.60 465.19 495.74 495.73 492.50 606.10 Loss on early extinguishment of debt 88.80 3.10 Other expense, net 30.40 1.60 3.46 73.63 77.31 79.25 81.23 (Loss) income before income taxes 233.30 138.80 (658.00) 85.78 424.04 803.34 929.83 914.83 Benefit for income taxes (26.10) (40.40) (259.50) 25.03 123.73 234.41 271.32 266.94 Net (loss) income 259.40 179.20 (398.50) 60.75 300.31 568.93 658.52 647.89 Net income attributable to noncontrolling Interests 15.10 7.60 15.40 14.32 14.32 14.32 14.32 14.32 Net income attributable to redeemable noncontrolling interests 11.80 14.70 8.30 13.68 13.68 13.68 13.68 13.68 Net (loss) income attributable to Coty Inc. 232.50 156.90 (422.20) 32.75 272.31 540.93 630.52 619.89 Net (loss) income attributable to Coty Inc. per common share: 0.66 0.45 (0.66) 0.05 0.42 0.84 0.98 0.96 Weighted-average common shares outstanding: 353.30 345.50 642.80 641.83 642.95 644.20 645.45 646.71 Coty Inc. Balance Sheet (In Millions) Fiscal Years Ending 06/30/2017 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022 Assets Current assets: Cash and Cash Equivalents 341.30 372.40 535.40 (129.90) 103.89 591.27 3378.49 2811.80 Restricted Cash 35.30 35.30 35.30 35.30 35.30 35.30 Trade Receivables 679.60 682.90 1470.30 1402.57 1472.70 1509.51 1547.25 1578.20 Inventories 557.80 565.80 1052.60 1062.04 1115.14 1143.02 1171.59 1195.03 Prepaid Expenses and Other Current Assets 191.00 206.80 487.90 512.30 537.91 551.36 565.14 576.44 Deferred Income Taxes 86.70 110.50 Total Current Assets 1856.40 1938.40 3581.50 2882.30 3264.93 3830.46 6697.77 6196.77 Property and Equipment, Net 500.20 638.60 1632.10 1788.55 1935.28 2075.21 2210.82 2344.26 Goodwill 1530.70 2212.70 8555.50 8555.50 8555.50 8555.50 8555.50 8555.50 Other Intangible Assets, Net 1913.60 2050.10 8425.20 8096.35 7780.33 7476.65 7184.82 6904.39 Deferred Income Taxes 10.40 15.70 72.60 3.13 15.47 29.30 33.91 33.37 Other Noncurrent Assets 207.60 180.10 281.30 286.93 292.66 298.52 304.49 310.58 Total Assets 6018.90 7035.60 22548.20 21612.75 21844.18 22265.64 24987.32 24344.86

Liabilities and Shareholder's Equity Current Liabilities: Accounts Payable 748.40 921.40 1732.10 2430.88 2427.02 2410.84 2396.45 2381.08 Accrued Expenses and Other Current Liabilities 719.20 748.40 1796.40 1403.91 1474.10 1510.95 1548.73 1579.70 Short-Term Debt and Current Portion of Long-Term Debt 28.80 161.80 209.10 204.40 218.80 218.80 2439.50 1550.20 Income and Other Taxes Payable 22.40 18.70 66.00 7.46 36.86 69.84 80.84 79.53 Deferred Income Taxes 7.40 4.90 Total Current Liabilities 1526.20 1855.20 3803.60 4046.64 4156.78 4210.43 6465.52 5590.52 Long-Term Debt, Net 2605.90 3936.40 6928.30 6816.75 6805.92 6760.55 6720.21 6677.11 Pension and Other Post-Employment Benefits 206.50 230.60 549.20 549.20 549.20 549.20 549.20 549.20 Deferred Income Taxes 352.60 339.20 924.90 36.94 182.62 345.98 400.46 394.00 Other Noncurrent Liabilities 256.70 233.80 473.40 553.65 557.22 555.96 668.35 621.59 Total Liabilities 4947.90 6595.20 12679.40 12003.20 12251.75 12422.12 14803.73 13832.42 Shareholders' Equity Preferred Stock 86.30 73.30 551.10 551.10 551.10 551.10 551.10 551.10 Common Equity 2048.30 2042.40 11211.30 11230.07 11248.85 11267.62 11286.40 11305.17 Retained Earnings (Accumulated Deficit) and Other Comprehensive Income (Loss) (467.90) (276.70) (454.80) (730.59) (766.36) (534.05) (212.75) 97.33 Treasury Stock (610.60) (1405.50) (1441.80) (1444.03) (1444.15) (1444.16) (1444.16) (1444.16) Total Coty Inc. Shareholders' Equity 969.80 360.20 9865.80 9606.56 9589.43 9840.52 10180.59 10509.44 Noncontrolling Interests 14.90 6.90 3.00 3.00 3.00 3.00 3.00 3.00 Total Shareholders' Equity 984.70 367.10 9868.80 9609.56 9592.43 9843.52 10183.59 10512.44 Total Liabilities and Shareholders' Equity 6018.90 7035.60 22548.20 21612.75 21844.18 22265.64 24987.32 24344.86 Coty Inc. Cash Flow Statement (In Millions) Fiscal Years Ending 06/30/2017 2015 2016 2017 Cash Flows from Operating Activities Net Income 259.40 179.20 (398.50) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation and amortization 230.90 232.00 555.10 Asset impairment charges 5.50 Deferred income taxes (87.20) (139.20) (390.00) Provision for bad debts 4.50 21.90 23.40 Provision for pension and other post-employment benefits 16.20 9.20 53.60 Share-based compensation 30.60 22.20 24.60 Gain on sale of assets (7.20) (24.80) (3.10) Loss on extinguishment of debt 88.80 3.10 Other 20.50 12.80 25.90 Change in operating assets and liabilities, net of effects from purchase of acquired companies: Trade Receivables (43.50) (44.50) (279.80) Inventories 29.40 27.20 162.30 Prepaid expenses and other current assets 6.00 6.70 (105.70) Accounts payable 7.00 148.20 540.90 Accrued expenses and other current liabilities 16.10 23.30 479.20 Income and other taxes payable 127.70 15.70 85.00 Other noncurrent assets (136.70) 9.00 23.40 Other noncurrent liabilities (36.20) (6.10) (38.80) Net cash provided by operating activities 526.30 501.40 757.50 Cash Flows from Investing Activities Capital expenditures (170.90) (150.10) (432.30) Payments for business combinations, net of cash acquired 11.70 (908.70) (742.60) Additions of goodwill (30.00) Proceeds from sale of assets 14.80 29.20 11.30 Payments related to loss on foreign currency contracts (29.60) Other 3.20 Net cash used in investing activities (171.20) (1059.20) (1163.60) Cash Flows from Financing Activities Proceeds from short-term debt, original maturity more than three months 652.20 19.10 9.50 Repayments of short-term debt, original maturity more than three months (655.00) (28.30) (10.20) Net (repayments of) proceeds from short-term debt, original maturity less than three months 11.60 25.40 (49.20) Proceeds from revolving loan facilities 853.00 1940.00 2244.40 Repayments of revolving loan facilities (1616.00) (1430.00) (2074.40) Proceeds from term loans and other longterm debt 800.90 3506.20 1075.00 Repayments of term loans and other long term debt (784.60) (2499.40) (136.10) Dividend payment (71.00) (89.00) (372.60) Net proceeds from issuance of Class A Common Stock and Series A Preferred Stock and related tax benefits 48.50 44.70 22.80

Net proceeds from issuance of Class A CommonStock to former CEO 12.50 Purchase of Class A Common Stock from former CEO (42.00) Payments for purchases of related party

Payments for purchases of Class A CommonStock held as Treasury Stock (263.10) (36.30) Net (payments for) proceeds from foreign currency contracts (37.90) (1.20) Payment for business combinations - Contingent consideration (0.80)

Proceeds from mandatorily redeemable noncontrolling interests Proceeds from noncontrolling interests 1.80 Distributions to noncontrolling interests (12.20) Purchase of additional noncontrolling interests Distributions to redeemable noncontrolling interests (9.10) Purchase of additional redeemable noncontrolling interests (15.80) Payment of deferred financing fees (11.20) Net cash (used in) provided by financing activities (1138.20) 1488.70 721.60 Coty Inc. Cash Flow Statement (Forecasted) (In Millions) Fiscal Years Ending 06/30/2017 2018E 2019E 2020E 2021E CV 2022 Cash from Operating Activities Net Income 32.8 272.3 540.9 630.5 619.9 Adjustments to Reconcile Net Income Provided by Operating Activities Depreciation 293.1 321.2 347.6 372.7 397.1 Amoritization 328.9 316.0 303.7 291.8 280.4 Change in Deferred Income Taxes (818.5) 133.3 149.5 49.9 (5.9) Change in Working Capital Accounts Change in Trade Receivables 67.7 (70.1) (36.8) (37.7) (30.9) Change in Inventories (9.4) (53.1) (27.9) (28.6) (23.4) Change in Prepaid Expenses and Other Current Assets (24.4) (25.6) (13.4) (13.8) (11.3) Change in Accounts Payable 698.8 (3.9) (16.2) (14.4) (15.4) Change in Income Taxes Payable (58.5) 29.4 33.0 11.0 (1.3) Change in Accrued Expenses and Other Current Liabilities (392.5) 70.2 36.9 37.8 31.0 Change in Other Noncurrent Liabilities 80.3 3.6 (1.3) 112.4 (46.8) Net Cash Provided by Operating Activities 198.2 993.4 1316.0 1411.6 1193.4 Cash from Investing Activities Net Capital Expenditures (449.6) (468.0) (487.5) (508.3) (530.5) Increase (Decrease) in Other Noncurrent Assets (5.6) (5.7) (5.9) (6.0) (6.1) Net Cash Used for Investing Activities (455.2) (473.7) (493.4) (514.3) (536.6) Cash from Financing Activities Changes in Current Portion of Long-Term Debt (4.7) 14.4 0.0 2220.7 (889.3) Proceeds from Issuance (Payment) of Long-Term Debt (111.5) (10.8) (45.4) (40.3) (43.1) Payments of Dividends (308.5) (308.1) (308.6) (309.2) (309.8) Proceeds from Issuance of Common Stock 18.8 18.8 18.8 18.8 18.8 Repurchases of Common Stock (2.2) (0.1) (0.0) (0.0) (0.0) Net Cash Provided by Financing Activities (408.2) (285.9) (335.2) 1889.9 (1223.4)

Change in Cash (665.3) 233.8 487.4 2787.2 (566.7) Cash from the Beginning of the Year 535.4 (129.9) 103.9 591.3 3378.5 Cash at the End of the Year (129.9) 103.9 591.3 3378.5 2811.8 Coty Inc. Common Size Income Statement (% of Sales) Fiscal Years Ending 06/30/2017 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022 Net revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of sales 36.42% 36.64% 35.93% 35.93% 35.93% 35.93% 35.93% 35.93% Depreciation 3.55% 3.51% 3.66% 3.65% 3.81% 4.02% 4.21% 4.39% Gross profit 60.02% 59.85% 60.41% 60.42% 60.26% 60.05% 59.86% 59.68% Selling, general and administrative expenses 47.01% 46.63% 53.07% 38.49% 44.36% 40.25% 39.26% 38.49% Amortization expense 1.70% 1.83% 3.60% 4.09% 3.75% 3.51% 3.29% 3.10% Restructuring costs 1.72% 2.00% 4.87% 0.40% 0.38% 0.37% 0.36% 0.35% Acquisition-related costs 0.78% 4.00% 4.65% 0.00% 0.00% 0.00% 0.00% 0.00% Asset impairment charges 0.00% 0.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Gain on sale of assets -0.16% -0.57% -0.04% 0.00% 0.00% 0.00% 0.00% 0.00% Operating (loss) income 8.99% 5.84% -5.72% 6.90% 11.78% 15.92% 16.95% 17.73% Interest expense, net 1.66% 1.88% 2.86% 5.79% 5.88% 5.73% 5.56% 6.71% Loss on early extinguishment of debt 2.02% 0.07% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other expense, net 0.00% 0.70% 0.02% 0.04% 0.87% 0.89% 0.89% 0.90% (Loss) income before income taxes 5.31% 3.19% -8.60% 1.07% 5.03% 9.29% 10.49% 10.12% Benefit for income taxes -0.59% -0.93% -3.39% 0.31% 1.47% 2.71% 3.06% 2.95% Net (loss) income 5.90% 4.12% -5.21% 0.76% 3.56% 6.58% 7.43% 7.17% Net income attributable to noncontrolling Interests 0.34% 0.17% 0.20% 0.18% 0.17% 0.17% 0.16% 0.16% Net income attributable to redeemable noncontrolling inter 0.27% 0.34% 0.11% 0.17% 0.16% 0.16% 0.15% 0.15% Net (loss) income attributable to Coty Inc. 5.29% 3.61% -5.52% 0.41% 3.23% 6.26% 7.12% 6.86% Coty Inc. Common Size Balance Sheet (% of Sales) Fiscal Years Ending 06/30/2017 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022 Assets Current assets: Cash and Cash Equivalents 7.77% 8.56% 7.00% -1.62% 1.23% 6.84% 38.13% 31.11% Restricted Cash 0.00% 0.00% 0.46% 0.44% 0.42% 0.41% 0.40% 0.39% Trade Receivables 15.46% 15.70% 19.22% 17.46% 17.46% 17.46% 17.46% 17.46% Inventories 12.69% 13.01% 13.76% 13.22% 13.22% 13.22% 13.22% 13.22% Prepaid Expenses and Other Current Assets 4.35% 4.76% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% Deferred Income Taxes 1.97% 2.54% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Current Assets 42.24% 44.57% 46.82% 35.88% 38.71% 44.31% 75.58% 68.56% Property and Equipment, Net 11.38% 14.68% 21.33% 22.27% 22.94% 24.00% 24.95% 25.94% Goodwill 34.83% 50.88% 111.83% 106.51% 101.44% 98.96% 96.55% 94.65% Other Intangible Assets, Net 43.54% 47.14% 110.13% 100.79% 92.24% 86.48% 81.08% 76.39% Deferred Income Taxes 0.24% 0.36% 0.95% 0.04% 0.18% 0.34% 0.38% 0.37% Other Noncurrent Assets 4.72% 4.14% 3.68% 3.57% 3.47% 3.45% 3.44% 3.44% Total Assets 136.94% 161.77% 294.74% 269.06% 258.99% 257.55% 281.98% 269.34%

Liabilities and Shareholder's Equity Current Liabilities: Accounts Payable 17.03% 21.19% 22.64% 30.26% 28.78% 27.89% 27.04% 26.34% Accrued Expenses and Other Current Liabilities 16.36% 17.21% 23.48% 17.48% 17.48% 17.48% 17.48% 17.48% Short-Term Debt and Current Portion of Long-Term Debt 0.66% 3.72% 2.73% 2.54% 2.59% 2.53% 27.53% 17.15% Income and Other Taxes Payable 0.51% 0.43% 0.86% 0.09% 0.44% 0.81% 0.91% 0.88% Deferred Income Taxes 0.17% 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Current Liabilities 34.72% 42.66% 49.72% 50.38% 49.28% 48.70% 72.96% 61.85% Long-Term Debt, Net 59.29% 90.51% 90.56% 84.86% 80.69% 78.20% 75.84% 73.87% Pension and Other Post-Employment Benefits 4.70% 5.30% 7.18% 6.84% 6.51% 6.35% 6.20% 6.08% Deferred Income Taxes 8.02% 7.80% 12.09% 0.46% 2.17% 4.00% 4.52% 4.36% Other Noncurrent Liabilities 5.84% 5.38% 6.19% 6.89% 6.61% 6.43% 7.54% 6.88% Total Liabilities 112.58% 151.65% 165.74% 149.43% 145.26% 143.69% 167.06% 153.04% Shareholders' Equity Preferred Stock 1.96% 1.69% 7.20% 6.86% 6.53% 6.37% 6.22% 6.10% Common Equity 46.60% 46.96% 146.55% 139.80% 133.37% 130.33% 127.37% 125.08% Retained Earnings (Accumulated Deficit) and Other Comprehensive Income (Loss) -10.65% -6.36% -5.94% -9.10% -9.09% -6.18% -2.40% 1.08% Treasury Stock -13.89% -32.32% -18.85% -17.98% -17.12% -16.70% -16.30% -15.98% Total Coty Inc. Shareholders' Equity 22.06% 8.28% 128.96% 119.59% 113.69% 113.82% 114.89% 116.27% Noncontrolling Interests 0.34% 0.16% 0.04% 0.04% 0.04% 0.03% 0.03% 0.03% Total Shareholders' Equity 22.40% 8.44% 129.00% 119.63% 113.73% 113.86% 114.92% 116.31% Total Liabilities and Shareholders' Equity 136.94% 161.77% 294.74% 269.06% 258.99% 257.55% 281.98% 269.34% Coty Inc. Value Driver Estimation

Fiscal Years Ending 06/30/2017 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022 NOPLAT EBITA Net Revenues 4395.2 4349.1 7650.3 8032.8 8434.5 8645.3 8861.5 9038.7 -Cost of Sales 1600.8 1593.5 2748.5 2886.2 3030.5 3106.3 3183.9 3247.6 -Depreciation 156.2 152.5 280.0 293.1 321.2 347.6 372.7 397.1 -Selling, general and administrative expenses 2066.1 2027.8 4060.0 3938.2 3741.3 3479.4 3479.4 3479.4 -Amoritization Expense 74.7 79.5 275.1 328.9 316.0 303.7 291.8 280.4 +Implied Interest on Operating Leases 18.7 16.7 20.2 31.8 34.9 37.7 40.4 43.1 EBITA 516.1 512.5 306.9 618.2 1060.3 1446.1 1574.0 1677.2

Less: Adjusted Taxes: Benefit for income taxes (26.1) (40.4) (259.5) 25.0 123.7 234.4 271.3 266.9 +Tax Shield on Interest Expense 21.3 23.9 63.8 135.7 144.7 144.6 143.7 176.9 +Tax Shield on Other Expense 0.0 8.9 0.5 1.0 21.5 22.6 23.1 23.7 +Tax Shield on Implied Lease Interest Expense 5.5 4.9 5.9 9.3 10.2 11.0 11.8 12.6 +Tax Shield on Loss on Early Extinguishment of Debt 25.9 0.9 0.0 +Tax Shield on Restructuring Costs 22.0 25.4 108.6 +Tax Shield on Acquisition-Related Costs 10.0 50.8 103.7 +Tax Shield on Asset Impaiment Charges 0.0 1.6 0.0 -Tax on Gain of Sale of Assets 2.1 7.2 0.9 Adjusted Taxes 56.4 68.6 22.0 171.1 300.0 412.6 449.9 480.1

Plus: Change in Deferred Tax (DT) Liabilities: DT Liabilities 7.4 4.9 0.0 0.0 0.0 0.0 0.0 0.0 +DT Long Term Liabilities 352.6 339.2 924.9 36.9 182.6 346.0 400.5 394.0 -DT Current Assets 86.7 110.5 0.0 0.0 0.0 0.0 0.0 0.0 -DT Long-Term Asset 10.4 15.7 72.6 3.1 15.5 29.3 33.9 33.4 Net DT Liabilities 262.9 217.9 852.3 33.8 167.2 316.7 366.5 360.6 Year-Over-Year Change in DT Liabilities 63.7 (45.0) 634.4 (818.5) 133.3 149.5 49.9 (5.9)

NOPLAT 523.4 398.9 919.2 (371.3) 893.6 1183.0 1173.9 1191.3

Invested Capital (IC) Operating Current Assets: Normal Cash 23.9 26.1 37.5 (9.1) 7.3 41.4 236.5 196.8 Trade Receivables 679.6 682.9 1470.3 1402.6 1472.7 1509.5 1547.3 1578.2 Inventories 557.8 565.8 1052.6 1062.0 1115.1 1143.0 1171.6 1195.0 Prepaid Expenses and Other Current Assets 191.0 206.8 487.9 512.3 537.9 551.4 565.1 576.4 Operating Currrent Assets 1452.3 1481.6 3048.3 2967.8 3133.0 3245.3 3520.5 3546.5

Operating Current Liabilities: Accounts Payable 748.4 921.4 1732.1 2430.9 2427.0 2410.8 2396.5 2381.1 Accrued Expenses and Other Current Liabilities 719.2 748.4 1796.4 1403.9 1474.1 1511.0 1548.7 1579.7 Income and Other Taxes Payable 22.4 18.7 66.0 7.5 36.9 69.8 80.8 79.5 Operating Currrent Liabilities 1490.0 1688.5 3594.5 3842.2 3938.0 3991.6 4026.0 4040.3

Net Operating Working Capital (37.7) (206.9) (546.2) (874.4) (805.0) (746.4) (505.5) (493.8)

Plus: NET PPE 500.2 638.6 1632.1 1788.6 1935.3 2075.2 2210.8 2344.3

Plus: PV of Operating Leases 334.2 403.1 636.0 697.0 754.2 808.7 861.6 913.6

Plus: Other Operating Assets Other Intangible Assets, Net 1913.6 2050.1 8425.2 8096.3 7780.3 7476.7 7184.8 6904.4 Other Noncurrent Assets 207.6 180.1 281.3 286.9 292.7 298.5 304.5 310.6 Less: Other Operating Liabilities Other Noncurrent Liabilities 256.7 233.8 473.4 553.7 557.2 556.0 668.3 621.6

Invested Capital 2661.20 2831.21 9955.03 9440.76 9400.30 9356.80 9387.84 9357.40

Return on Invested Capital (ROIC) Calculation NOPLAT 523.4 398.9 919.2 (371.3) 893.6 1183.0 1173.9 1191.3 /Beginning Invested Capital 2605.7 2661.2 2831.2 9955.0 9440.8 9400.3 9356.8 9387.8 ROIC 20.09% 14.99% 32.47% -3.73% 9.46% 12.58% 12.55% 12.69%

Economic Profit (EP) Calculation Beginning Invested Capital 2605.7 2661.2 2831.2 9955.0 9440.8 9400.3 9356.8 9387.8 *(ROIC-WACC) 0.1 0.1 0.3 (0.1) 0.0 0.1 0.1 0.1 EP 386.72 259.29 770.73 (893.43) 398.42 689.97 683.19 698.89

Free Cash Flow (FCF) Calculation NOPLAT 523.4 398.9 919.2 (371.3) 893.6 1183.0 1173.9 1191.3 -(Invested Capital - Beginning Invested Capital) 55.5 170.0 7123.8 (514.3) (40.5) (43.5) 31.0 (30.4) FCF 467.89 228.85 (6204.59) 142.96 934.02 1226.49 1142.90 1221.70 Coty Inc. Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity Risk-Free Rate 2.79% Equity Risk Premium 4.65% Beta 0.80 Cost of Equity 6.51%

Cost of Debt Pre-Tax Cost of Debt 5.00% Marginal Tax Rate 29.18% After-Tax Cast of Debt 3.54%

Value of Equity Share Price $16.31 Shares Outstanding 641.83 Value of Equity $10,468.21

Value of Debt BV of Short-Term Debt 209.10 BV of Long-Term Debt 6928.30 PV of Operating Leases 636.05 Value of Debt 7773.45

Weights Equity 57.39% Debt 42.61%

WACC Calculation Cost of Equity 6.51% * Weight of Equity 57.39% After-Tax Cost of Debt 3.54% *Weight of Debt 42.61% WACC 5.24% Coty Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.00% CV ROIC 12.69% WACC 5.24% Cost of Equity 6.51%

Fiscal Years Ending 06/30/2017 2017 2018E 2019E 2020E 2021E CV 2022

Discounted Cash Flow Model Free Cash Flow 143 934 1226 1143 Continuting Value 30926 Future Cash Flows 143 934 1226 1143 30926 Discount Periods 1 2 3 4 4 Discounted Cash Flows 136 843 1052 932 25207

Value of Operating Assets 28170 Current Debt (209) Long-Term Debt (6928) Other Current Liabilities (3595) Other Liabilities (1948) Pension and Other Post-Employment Benefits (549) Preferred Stock (551) PV of Operating Leases (636) PV of ESOP (46) Value of Equity 13708 Shares Outstanding 647 Intristic Stock Price $ 21.20 Adjusted Stock Price $ 21.47

Economic Profit Model Economic Profit -893.4 398.4 690.0 683.2 Continuing Value 21539 Future Cash Flows -893.4 398.4 690.0 683.2 21538.6 Discount Periods 1 2 3 4 4 PV of Cash Flows -849 360 592 557 17556

PV of Economic Profit 18215 Plus: Beginning IC 9955.0 Value of Operating Assets 28170 Current Debt (209) Long-Term Debt (6928) Other Current Liabilities (3595) Other Liabilities (1948) Pension and Other Post-Employment Benefits (549) Preferred Stock (551) PV of Operating Leases (636) PV of ESOP (46) Value of Equity 13708 Shares Outstanding 647 Intristic Stock Price $ 21.20 Adjusted Stock Price $ 21.47 Coty Inc. Sensitivity Analysis

Share Price Beta Share Price Pre-Tax Cost of Debt $ 21.47 0.65 0.7 0.75 0.8 0.85 0.9 0.95 $ 21.47 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 4.35% $ 29.87 $ 27.55 $ 25.42 $ 23.46 $ 21.65 $ 19.97 $ 18.42 27.68% $ 24.43 $ 23.24 $ 22.11 $ 21.03 $ 20.00 $ 19.01 $ 18.07 4.45% $ 29.15 $ 26.84 $ 24.72 $ 22.78 $ 20.98 $ 19.31 $ 17.77 28.18% $ 24.58 $ 23.39 $ 22.25 $ 21.17 $ 20.14 $ 19.16 $ 18.22 4.55% $ 28.46 $ 26.16 $ 24.05 $ 22.11 $ 20.33 $ 18.68 $ 17.14 Marginal Tax 28.68% $ 24.72 $ 23.53 $ 22.40 $ 21.32 $ 20.29 $ 19.31 $ 18.37 Risk Premium 4.65% $ 27.78 $ 25.49 $ 23.39 $ 21.47 $ 19.70 $ 18.06 $ 16.54 Rate 29.18% $ 24.87 $ 23.68 $ 22.55 $ 21.47 $ 20.44 $ 19.46 $ 18.52 4.75% $ 27.12 $ 24.84 $ 22.75 $ 20.84 $ 19.08 $ 17.45 $ 15.95 29.68% $ 25.01 $ 23.83 $ 22.70 $ 21.62 $ 20.59 $ 19.61 $ 18.67 4.85% $ 26.47 $ 24.20 $ 22.13 $ 20.23 $ 18.48 $ 16.87 $ 15.37 30.18% $ 25.16 $ 23.98 $ 22.85 $ 21.77 $ 20.74 $ 19.76 $ 18.82 4.95% $ 25.84 $ 23.59 $ 21.53 $ 19.64 $ 17.90 $ 16.30 $ 14.82 30.68% $ 25.31 $ 24.13 $ 23.00 $ 21.92 $ 20.89 $ 19.91 $ 18.97

Share Price WACC Share Price Risk-Free Rate $ 21.47 5.09% 5.14% 5.19% 5.24% 5.29% 5.34% 5.39% $ 21.47 2.76% 2.77% 2.78% 2.79% 2.80% 2.81% 2.82% 1.25% $ 17.89 $ 17.35 $ 16.82 $ 16.31 $ 15.81 $ 15.32 $ 14.84 11.19% $ 17.27 $ 17.20 $ 17.12 $ 17.05 $ 16.98 $ 16.91 $ 16.83 1.50% $ 19.55 $ 18.95 $ 18.37 $ 17.80 $ 17.25 $ 16.71 $ 16.18 11.69% $ 18.78 $ 18.70 $ 18.63 $ 18.55 $ 18.48 $ 18.40 $ 18.33 CV NOPLAT 1.75% $ 21.45 $ 20.78 $ 20.13 $ 19.50 $ 18.89 $ 18.29 $ 17.71 CV ROIC 12.19% $ 20.26 $ 20.18 $ 20.10 $ 20.02 $ 19.95 $ 19.87 $ 19.79 Growth 2.00% $ 23.67 $ 22.91 $ 22.18 $ 21.47 $ 20.78 $ 20.11 $ 19.47 Growth 12.69% $ 21.71 $ 21.63 $ 21.55 $ 21.47 $ 21.39 $ 21.31 $ 21.23 2.25% $ 26.27 $ 25.40 $ 24.57 $ 23.76 $ 22.98 $ 22.23 $ 21.50 13.19% $ 23.14 $ 23.05 $ 22.97 $ 22.89 $ 22.81 $ 22.73 $ 22.65 2.50% $ 29.37 $ 28.37 $ 27.41 $ 26.48 $ 25.58 $ 24.72 $ 23.89 13.69% $ 24.55 $ 24.46 $ 24.38 $ 24.29 $ 24.21 $ 24.13 $ 24.04 2.75% $ 33.14 $ 31.95 $ 30.82 $ 29.73 $ 28.69 $ 27.69 $ 26.72 14.19% $ 25.93 $ 25.85 $ 25.76 $ 25.68 $ 25.59 $ 25.51 $ 25.42

Share Price COGS (% of Sales) $ 21.47 34.43% 34.93% 35.43% 35.93% 36.43% 36.93% 37.43% 35.49% $ 25.56 $ 25.07 $ 24.59 $ 24.10 $ 23.61 $ 23.13 $ 22.64 36.49% $ 24.68 $ 24.20 $ 23.71 $ 23.22 $ 22.74 $ 22.25 $ 21.76 SG&A (% of 37.49% $ 23.81 $ 23.32 $ 22.83 $ 22.35 $ 21.86 $ 21.37 $ 20.89 Sales in CV 38.49% $ 22.93 $ 22.44 $ 21.96 $ 21.47 $ 20.98 $ 20.50 $ 20.01 Year) 39.49% $ 22.05 $ 21.57 $ 21.08 $ 20.59 $ 20.11 $ 19.62 $ 19.13 40.49% $ 21.18 $ 20.69 $ 20.20 $ 19.72 $ 19.23 $ 18.74 $ 18.25 41.49% $ 20.30 $ 19.81 $ 19.33 $ 18.84 $ 18.35 $ 17.86 $ 17.38 Coty Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Key Assumptions CV growth 2.00% CV ROE 5.90% Cost of Equity 6.51% Fiscal Years Ending 06/30/2017 2017 2018E 2019E 2020E 2021E CV 2022 EPS 0.05 0.42 0.84 0.98 0.96 Future Cash Flows P/E Multiple (CV Year) 14.65 EPS (CV Year) 0.96 Future Stock Price 14.05 Dividends Per Share $ 0.48 $ 0.48 $ 0.48 $ 0.48 Future Cash Flows $ 0.48 $ 0.48 $ 0.48 $ 0.48 $ 14.05 Discount Periods 1 2 3 4 4 Discounted Cash Flows $ 0.45 $ 0.42 $ 0.40 $ 0.37 $ 10.91

Intrinsic Value $ 12.56 Adjusted Stock Price $ 12.72 Coty Inc. Relative Valuation Model

EPS EPS Ticker Company Price 2018E 2019E P/E 18 P/E 19 EL Estee Lauder $124.61 $3.99 $4.44 31.23 28.07 IFF International Flavours and Fragrances $146.77 $5.75 $6.24 25.53 23.52 AVP Avon $1.92 $0.12 $0.28 16.00 6.86 Average 24.25 19.48

COTY Coty Inc. $16.31 $0.05 $0.42 319.9 38.5

Implied Relative Value: P/E (EPS17) $ 1.24 P/E (EPS18) $ 8.26 Coty Inc. Key Management Ratios

Fiscal Years Ending 06/30/2017 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022

Liquidity Ratios Current Ratio (Total Current Assets/Total Current Liabilities) 1.22 1.04 0.94 0.71 0.79 0.91 1.04 1.11 Quick Ratio ((Cash + Trade Receivables)/ Total CL) 0.67 0.57 0.53 0.31 0.38 0.50 0.76 0.79 Cash Ratio (Cash/CL) 0.22 0.20 0.14 -0.03 0.02 0.14 0.52 0.50

Activity or Asset-Management Ratios

Receivables Turnover Ratio (Net Revenue/ Trade Receivables) 6.47 6.37 5.20 5.73 5.73 5.73 5.73 5.73 Day's Receivables (365/Receivables Turnover Ratio) 56.44 57.31 70.15 63.73 63.73 63.73 63.73 63.73 Inventory Turnover Ratio (COGS/Inventories) 2.87 2.82 2.61 2.72 2.72 2.72 2.72 2.72 Fixed Asset Turnover Ratio (Net Revenues/Net PPE) 8.79 6.81 4.69 4.49 4.36 4.17 4.01 3.86

Financial Leverage Ratios Debt Ratio (Total Liabilities/Total Assets) 0.82 0.94 0.56 0.56 0.56 0.56 0.59 0.57 Debt-Equity Ratio (Total Liabilities/Total Shareholders Equity) 5.02 17.97 1.28 1.25 1.28 1.26 1.45 1.32 Cash Flow-Debt Ratio (Net Cash Provided by Operating Activities/(LT Debt+ST Debt and Current Portion of LT Debt)) 0.20 0.12 0.11 0.03 0.14 0.19 0.15 0.15 Interest Coverage Ratio (Operating Income/Interest Expense) 5.41 3.10 -2.00 1.19 2.00 2.78 3.05 2.64

Profitability Ratios ROA (Net Income/ Total Assets) 3.86% 2.23% -1.87% 0.15% 1.25% 2.43% 2.52% 2.55% ROE (Net Income/Shareholder's Equity) 23.61% 42.74% -4.28% 0.34% 2.84% 5.50% 6.19% 5.90% Gross Profit Margin (Gross Profit/Net Revenue) 60.02% 59.85% 60.41% 60.42% 60.26% 60.05% 59.86% 59.68% Net Profit Margin (Net Income/Net Revenue) 5.29% 3.61% -5.52% 0.41% 3.23% 6.26% 7.12% 6.86%

Payout Policy Ratios Dividend Payout Ratio (Dividends Per Share/EPS) 30.54% 56.72% -88.25% 942.07% 113.14% 57.05% 49.04% 49.98%

Total Payout Ratio ((Dividend + Stock Repurchase)/ Net Revenue) 143.70% 56.72% -96.85% 948.86% 113.18% 57.05% 49.04% 49.98% Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013)

Operating Operating Operating Operating Operating Fiscal Years Ending 42916 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases 2018 126.1 2017 70.2 2016 59.0 2015 67.6 2014 62.6 2019 114.3 2018 67.3 2017 49.5 2016 54.7 2015 59.4 2020 98.3 2019 59.9 2018 43.2 2017 44 2016 38 2021 82.2 2020 50.4 2019 37.7 2018 40.6 2017 30.9 2022 73.7 2021 45.5 2020 35.7 2019 37.4 2018 30.6 Thereafter 290.4 Thereafter 214.3 Thereafter 205.2 Thereafter 243.2 Thereafter 236.9 Total Minimum Payments 785 Total Minimum Payments 507.6 Total Minimum Payments 430.3 Total Minimum Payments 487.5 Total Minimum Payments 458.4 Less: Interest 149 Less: Interest 104 Less: Interest 96 Less: Interest 113 Less: Interest 112 PV of Minimum Payments 636 PV of Minimum Payments 403 PV of Minimum Payments 334 PV of Minimum Payments 374 PV of Minimum Payments 347

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 5.00% Pre-Tax Cost of Debt 5.00% Pre-Tax Cost of Debt 5.00% Pre-Tax Cost of Debt 5.00% Pre-Tax Cost of Debt 5.00% Number Years Implied by Year 6 Payment 3.9 Number Years Implied by Year 6 Payment 4.7 Number Years Implied by Year 6 Payment 5.7 Number Years Implied by Year 6 Payment 6.5 Number Years Implied by Year 6 Payment 7.7

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 126.1 120.1 1 70.2 66.9 1 59 56.2 1 67.6 64.4 1 62.6 59.6 2 114.3 103.7 2 67.3 61.0 2 49.5 44.9 2 54.7 49.6 2 59.4 53.9 3 98.3 84.9 3 59.9 51.7 3 43.2 37.3 3 44 38.0 3 38 32.8 4 82.2 67.6 4 50.4 41.5 4 37.7 31.0 4 40.6 33.4 4 30.9 25.4 5 73.7 57.7 5 45.5 35.7 5 35.7 28.0 5 37.4 29.3 5 30.6 24.0 6 & beyond 73.7 202.0 6 & beyond 45.5 146.4 6 & beyond 35.7 136.8 6 & beyond 37.4 159.3 6 & beyond 30.6 150.8 PV of Minimum Payments 636.0 PV of Minimum Payments 403.1 PV of Minimum Payments 334.2 PV of Minimum Payments 374.0 PV of Minimum Payments 346.6 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 9,400,000 Average Time to Maturity (years): 7.50 Expected Annual Number of Options Exercised: 1,253,333

Current Average Strike Price: $ 14.98 Cost of Equity: 6.51% Current Stock Price: $16.31

2018E 2019E 2020E 2021E CV 2022 Increase in Shares Outstanding: 1,253,333 1,253,333 1,253,333 1,253,333 1,253,333 Average Strike Price: $ 14.98 $ 14.98 $ 14.98 $ 14.98 $ 14.98 Increase in Common Stock Account: 18,774,933 18,774,933 18,774,933 18,774,933 18,774,933

Change in Treasury Stock 36,300,000 2,225,628 128,117 6,924 351 Expected Price of Repurchased Shares: $ 16.31 $ 17.37 $ 18.50 $ 19.71 $ 20.99 Number of Shares Repurchased: 2,225,628 128,117 6,924 351 17

Shares Outstanding (beginning of the year) 642,800,000 641,827,705 642,952,921 644,199,330 645,452,312 Plus: Shares Issued Through ESOP 1,253,333 1,253,333 1,253,333 1,253,333 1,253,333 Less: Shares Repurchased in Treasury 2,225,628 128,117 6,924 351 17 Shares Outstanding (end of the year) 641,827,705 642,952,921 644,199,330 645,452,312 646,705,628 VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol COTY Current Stock Price $16.31 Risk Free Rate 2.79% Current Dividend Yield 2.95% Annualized St. Dev. of Stock Returns 33.21%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 9,400,000 14.98 7.50 $ 4.90 $ 46,048,787 Total 9,400,000 $ 14.98 7.50 $ 7.18 $ 46,048,787