Natura &Co's sales stabilized in Q2 and profitability is impacted by cost pressure

Strong growth by Natura brand and Aesop, further improvement in Avon fundamentals

SÃO PAULO, Aug. 12, 2022 /PRNewswire/ -- Natura &Co's (NYSE – NTCO; B3 – NTCO3) second--quarter performance continued to reflect the challenging environment in which it is operating, but the Group recorded positive signs including strong growth by the Natura brand in Brazil and Latin America, another quarter of double-digit growth by Aesop in constant currency and further improvement in Avon's fundamentals.

Natura &Co posted consolidated net revenue of R$8.7 billion, up 0.4% at constant currency (-8.6% in BRL) in the second quarter, on the back of a very strong comparable base, as Q2 of last year saw sales growth of 31.7% at constant currency (CC) and 36.2% in BRL. Adjusted EBITDA margin was 8.0% (-50 bps). Net income was R$ (766.0) million and the Group ended the quarter with a solid net cash position of R$ 4.3 billion.

Digitally-enabled sales represented 49.5% of total sales and were above their pre-pandemic levels at all business units despite a channel rebalancing as retail reopened, with continued growth at Natura and Avon. Digitally-enabled sales include online sales (e-commerce + social selling) and relationship selling using digital apps. At Avon International, penetration of the Avon On app (active representatives who logged in at least once in the last three campaigns) reached 23% in Q2-22, compared to nearly 16% in Q2-21. At Natura Latam, the average number of consultants sharing content increased to 28% this quarter, compared to 24% in Q2-21, while orders through the 1.5 million+ consultant online stores increased by 29% in the region.

Fabio Barbosa, Group CEO of Natura &Co, declared: "In my first few weeks as Group CEO, I have focused mainly on two priorities: the first is redesigning Natura &Co's organizational structure to make it lighter and leaner. At this stage, we have mapped significant savings at the holding company level. If the Company had implemented those changes last year the impact would have been an annualized reduction of at least 40% in recurring corporate expenses. Other changes and estimated savings will be announced later. The second is a review of the governance model and ways of working within Natura &Co, with the holding company strongly concentrated on defining key performance indicators, monitoring and tracking the performance of more autonomous brands, leading the allocation of resources within the group and continuing to promote our 2030 Commitment to life sustainability vision. We are confident that a leaner and a more agile structure, built on a strong foundation of accountability for results, will empower the Business Units to respond with agility to their current strategic and market challenges. At the same time, we are strongly focused on improving the fundamentals of our underperforming businesses, which we regard as our principal challenge and main upside driver.

Though we expect our businesses' revenues to trend better in the second half of the year, we believe the challenges in the macro environment will persist and our margins will remain pressured in the short term. In this context, our clear and immediate priority is to focus on margins and operational cash-flow, and the teams at all our brands and businesses are mobilized and incentivized on those clear goals."

Performance by business unit:

Natura &Co Latam's net revenue was up 5.6% at CC (+0.4% in BRL) in Q2.  The Natura brand posted strong 14.8% growth in Latin America at constant currency (+12.2% in BRL) in the quarter. In Brazil net revenue grew by +14.3% in Q2-22, supported by an acceleration in consultant productivity, up by +17.5% in Q2. In Hispanic Latam, net revenue was up +15.5% (+8.8% in BRL.) Growth was mainly driven by Argentina and Colombia, offsetting a decrease in Chile. The Natura brand was again ranked the strongest cosmetics brand in the world in Brand Finance's brand strength index. The Avon brand's revenue was down -5.0% in CC (-12.8% in BRL). In Brazil, net revenue improved sequentially since Q3-21 but still decreased by -10.7% in Q2-22. This was mainly due to a drop of -31% in Fashion and Home sales, while Beauty sales increased nearly +5% in the quarter. In Hispanic markets, net revenue was down -2.8% at CC (-13.9% in BRL), also due to lower Fashion and Home sales and reflecting a very strong comparable base in Q2-21 (+68.0% vs Q2-20 at CC). The new commercial model is showing significant progress in Ecuador and Colombia, with sales growth and a sequential improvement in the number of representatives, activity and productivity. Adjusted EBITDA margin for Natura &Co Latam was 10.8%, stable vs last year, supported by synergies, revenue management and strict financial discipline.

Avon International's net revenue decreased 11.4% at CC (-25.4% in BRL) in Q2. Performance was mainly impacted by the war in Ukraine (excluding Russia and Ukraine, sales were down -5.8% at CC), low consumer confidence and eroding household purchasing power in Europe as well as fewer representatives in Europe. Avon's business fundamentals continued to improve as the new commercial model, now implemented in 16 markets, resulted in higher productivity and activity as well as a stabilizing number of representatives outside Europe. Adjusted EBITDA margin stood at 3.3%, -100 bps vs Q2-21, due to substantially higher cost pressure, the impact of the war in Ukraine and lower volumes, mainly in European markets These were partially offset by an effective revenue management strategy across markets and cost reduction resulting from strict financial discipline and a leaner operating model.

The Body Shop's net revenue was down 11.8% at CC (-25.3% in BRL) in Q2, mainly impacted by post-lockdown channel rebalancing, as the decrease in sales at TBS At Home ("TBSAH") and e-commerce outpaced the progressive retail recovery. Store revenues were up vs last year (excluding buybacks) and improved vs. Q1-22, with growing footfall, albeit at a slower than expected pace, and are still trading down compared to Q2-19. Sales to franchisees posted a decline in Q2, but are showing increased retail sales month on month, further reducing inventory as they recover from lockdowns. Adjusted EBITDA margin was 3.3%, -970 bps vs Q2-21, driven by lower volumes and channel mix, due to the decrease at TBSAH and in e-commerce and lower sell-in to franchisee partners. To address these challenges through H2, management has been focused on actions to drive margin improvement, including leveraging recent investments to drive store productivity, especially in the critical fourth quarter; continued store footprint optimization; margin improvement from focusing on category mix (skincare) and revenue management, as well as a detailed review of SG&A costs.

Aesop posted another excellent quarter, with net revenue increasing by 24.5% at CC (+5.7% in BRL). All markets delivered double-digit growth, led by North America and Asia-Pacific. Aesop continues to consistently post superior sales growth on a like-for-like basis, improving overall store productivity, while continuing to roll out new stores in new cities such as Madrid (Spain) and Cambridge (UK) as well as in existing markets such as Japan, South Korea, Canada and Australia. Q2 adjusted EBITDA margin was 16.2%, -480 bps compared to Q2-21, mainly due to planned higher investments in digital, categories, geographies (mainly preparations for China entry by end-2022) and human resources to continue driving future sustainable growth.

About Natura &Co
Natura &Co is a global, purpose-driven, multi-channel and multi-brand cosmetics group which includes Avon, Natura, The Body Shop and Aesop. Natura &Co posted net revenues of R$40.1 billion in 2021. The four companies that form the group are committed to generating positive economic, social and environmental impact. For 130 years Avon has stood for women: providing innovative, quality beauty products which are primarily sold to women, through women. Founded in 1969, Natura is a Brazilian multinational in the cosmetics and personal care segment, leader in direct sales. Founded in 1976 in Brighton, England, by Anita Roddick, The Body Shop is a global beauty brand that seeks to make a positive difference in the world. The Australian beauty brand Aesop was established in 1987 with a quest to create a range of superlative products for skin, hair and the body.