Coty Inc. (COTY) Q4 2022 Earnings Call Transcript

Coty Inc.  (NYSE: COTY) Q4 2022 earnings call dated Aug. 25, 2022

Corporate Participants:

Sue Y. Nabi — Chief Executive Officer

Laurent Mercier — Chief Financial Officer

Analysts:

Stephanie Wissink — Jefferies, LLC — Analyst

Nik Modi — RBC Capital Markets, LLC — Analyst

Javier Escalante — Evercore Group LLC — Analyst

Olivia Tong — Raymond James & Associates, Inc. — Analyst

Chris Carey — Wells Fargo Securities, LLC — Analyst

Steve Powers — Deutsche Bank AG — Analyst

Korinne Wolfmeyer — Piper Sandler & Co. — Analyst

Mark Astrachan — Stifel Financial Corp. — Analyst

Questions and Answers:

Operator

Good day. My name is Chelsea, and I’ll be your conference operator. At this time, I would like to welcome everyone to Coty’s Fourth Quarter and Fiscal 2022 Question and Answer Conference Call. As a reminder, this conference call is being recorded today, August 25th, 2022. Please note that earlier this morning, Coty issued a press release and prepared remarks webcast, which can be found on its Investor Relations website. On today’s call are Sue Nabi, Chief Executive Officer; and Laurent Mercier, Chief Financial Officer.

I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty’s earnings release and the reports filed with the SEC where the company lists factors that could cause actual results to differ materially from those forward-looking statements.

In addition, except we’re noted, the discussion of Coty’s financial results and Coty’s expectations reflect certain adjustments as specified in the non-GAAP Financial Measures section of the company’s release.

With that, we will now open the lines for questions. [Operator Instructions] Our first question will come from Stephanie Wissink with Jefferies. Please go ahead.

Stephanie Wissink — Jefferies, LLC — Analyst

Thank you. Good day, everyone. We have two questions. The first is just on Travel Retail, China, and ecommerce. Those really stood out to us in the quarter and the year as big drivers of growth. So can you talk about your expectations for those drivers in your fiscal ’23 guidance, specifically China, if you can give us some sense of what you’re assuming?

And then, Sue, I’m going to ask you a tough question. I’m hoping you’re willing to answer. But there’s been a lot made about the Kering relationship and that portfolio of brands. And I’m hoping you can share a little bit about since you’ve arrived at Coty, how that relationship has changed, the commitment you have to those brands, and maybe some of the performance indicators that you’re looking at to reinforce that relationship. Thank you.

Sue Y. Nabi — Chief Executive Officer

Yes, good morning. Thank you so much for your questions. So, first, let me start with the first part, which is around the strength of the business. Indeed the Travel Retail, ecommerce, and China, and I will say few words about China later, are clearly, outside retail and international, key contributors to this, I would say, best-in-class performance that we had in Q4 and in fiscal ’22. I really hope that everyone will recognize today and now that these 8 quarter results on par or ahead of expectations of our guidances and, of course, most of our peers, is clearly hopefully going to be recognized as a great achievement, and that’s very important point.

And in terms of Travel Retail and the fact that Travel Retail has been a key contributor, it’s true that for all of us, specifically those who’ve been traveling, we’ve seen there is a huge surge in terms of travel worldwide. And this surge of travel, of course, translates into huge [Phonetic] figures. If I may say specifically at Coty, our Travel Retail channel has been doing fantastically well during the quarter. In EMEA, to take one example, it’s 3 times, triple-digit growth, surge in terms of what we are seeing there. This is across the full product [Phonetic] categories, our fragrances and specifically our highest end fragrances and more artisanal or niche fragrances are doing fantastically well gaining market share, thanks to Travel Retail exclusives but also thanks to the level of innovations, our new category, because we entered — before the pandemic Travel Retail was a one category channel. It was mainly fragrances. Now Travel Retail is fragrances, prestige makeup and, of course, skincare. And on prestige makeup, there we’ve been doing also fantastic figures, thanks to the different brands.

The Burberry makeup, Gucci makeup, or more Kylie Cosmetics, which had fantastic results in the top airports around the world. And that definitely means [Phonetic] this channel is now fully benefiting from the repositioning of Lancaster from the sun care to a skincare brand that started first in Hainan, but currently spread into mainland China at Sephora as an exclusive partnership, and we’ve seen that this brand has been posting a double-digit growth in fiscal ’22, which overall also had to do a lot with the Travel Retailer performance.

Internet is clearly doing very, very well. This is clearly, I would say, the case in the Prestige division. It’s even more the case on the Consumer division. And this, honestly, I have to say, it’s a big satisfaction for us because our brands are becoming darling brands on social media, specifically, CoverGirl, of course, but also Rimmel. We’ve done a recent launch [Indecipherable] that happened at the end of the quarter and beginning of Q1 that’s doing fantastically well, 100% cocreated with TikTokers. So clearly this part of the business is a key contributor. And you can imagine that in the coming quarter it’s going to continue to be a key contributor.

When it comes to the China topic, China, of course, like everyone, we’ve been impacted by the lockdowns at the end of Q3 and during Q4. That’s what we are seeing in Q1. Now two months into Q1 is that China has, for Coty at least, strongly rebounded. We are seeing a double-digit growth, not at the level of what we had [Indecipherable] prior to the first, I would say, slowdown because of the restrictions, but very, very strong performance. And overall, Coty China had a plus 11% performance in fiscal ’22 to be compared to a market that was minus 1%. So that’s what I can tell you on the business side.

Now concerning the second part of your question, first of all, I’m not going, as you can imagine, to do a lot of comments on speculations. But what I can tell you is that our long-term partnerships with our top fashion houses are continuing to be of a great quality. And the other thing that I would like also to stress, now that you’re asking me the question, is that I’m taking again this opportunity to repeat that no key license is up to renewal before five years for us. So everything else is speculation, but these are the two key elements I wanted to share with you today.

Stephanie Wissink — Jefferies, LLC — Analyst

Thank you.

Sue Y. Nabi — Chief Executive Officer

I hope this answers your two questions, Stephanie.

Stephanie Wissink — Jefferies, LLC — Analyst

It does, Sue. Thank you very much.

Sue Y. Nabi — Chief Executive Officer

Thank you.

Operator

Our next question will come from Nik Modi with RBC. Please go ahead.

Nik Modi — RBC Capital Markets, LLC — Analyst

Thank you. Good morning, everyone. Sue, I was hoping you could just provide some context. Of course, I think the resiliency of beauty is pretty clear during downturns, but I wanted to understand within your guidance, how you’re thinking about the macroeconomic backdrop. Do you think this is going to be some gradual, very shallow situation, or are you expecting things to deteriorate further from here? So that’s the first question.

And then the second question is just maybe an update on what’s going on with inventories at retail, given that they’re managing their inventories very tightly right now. So just wanted to get some perspective on what’s going on with inventory. Thank you.

Sue Y. Nabi — Chief Executive Officer

Yeah. Good morning, Nik. Thank you for the question. So again, what I can tell you when it comes to the macro and what we are seeing currently, which is the best indicator of what we will hopefully oversee that the beauty category is not showing any signs of slowdown, specifically when it comes to prestige, but also the premise part of consumer beauty. Clearly consumers are more than ever, I have to say, premiumizing, which is again I guess for all of us a kind of surprise in the middle of all this pressure — international pressure, but they are premiumizing more and more. And during Q4, what we have seen is the movement, if I take the fragrance category, moving from Eau de Toilette to Eau de Parfum, which are more expensive because more concentrated versions of scenting. This movement is confirmed and is only accelerating, I have to say.

So we don’t see consumers trading down. We see them trading up in prestige behind categories such as fragrances, but also behind categories such as prestige makeup. And on consumer beauty side, the part [Phonetic] that’s the best preserved, and if you listen to what some of our partner retailers have been sharing recently during their earnings, it’s clearly the premiumized part of the consumer beauty that’s doing fantastically well. Probably, I would say that in the past we were putting on one side things that are pricier than things that are very, very affordable. I do believe that in beauty today, the market will be all about cool or desirable brands be it for mass or prestige and not cool and not desirable brands be it for mass and prestige. And those that are cool and desirable are by definition going to be protected, overprotected probably because this has become, I would say, absolutely we call it the fragrance index or the fragrance effect.

It’s clearly these products that are not only female, but also men fragrances are really consumed today by men, women, Gen-Zs, [Indecipherable] to take this example. And these are categories that I do believe because they’re making you look or feel better are becoming more and more essential categories rather than what we could consider as categories they would shop only when you when you’re okay. So I think it’s really this that I see in terms of macro trends.

In terms of inventories, to answer the second factor, the retailers have indeed excess inventories in some other category but nothing [Indecipherable]. If you listen again to the earnings from the different retailers, if there is one [Indecipherable] category, it’s in the beauty.

Nik Modi — RBC Capital Markets, LLC — Analyst

Excellent. Thank you very much.

Sue Y. Nabi — Chief Executive Officer

Welcome.

Operator

Our next question will come from Javier Escalante with Evercore. Please go ahead.

Javier Escalante — Evercore Group LLC — Analyst

Good morning, everyone. My question has to do with the Consumer division. If you can give us an update with regards to the supply chain challenges that CoverGirl had earlier in the quarter. And also how you see the profitability of the business going forward? It improved at least more than I thought in Q4. So if you can expand that, that would be great. Thank you.

Sue Y. Nabi — Chief Executive Officer

Yes. So, Javier, I will take the question. So, hi.

Javier Escalante — Evercore Group LLC — Analyst

Hi.

Laurent Mercier — Chief Financial Officer

So question on beauty and question on supply chain, and I would say it’s not specific to consumer beauty. I will make comments on the global supply chain. So number one, [Indecipherable] we raised last time [Indecipherable] conditions resolved. And then when we had the call, we were telling you that this was really in good progress. So now this is resolved. However, from a global standpoint, obviously, as our peers, we are not immune from the current supply issues. But definitely, we are well protected, and we have a service level which is in the low 90s, which is a good performance.

Why we are protecting this is definitely because we worked now for several quarters on dual-sourcing, on local sourcing, and we have also some contract on freight which could protect us. So this is really the combination of all these levers. And as you can imagine and as you know, this is a daily focus. From all the things we need to keep strong improvement and control on supply chain. There is another angle on supply chain [Indecipherable] the demand in fact is higher. So we have the both elements and this is indeed what we have to manage. But we are really in control and managing nicely the current concerns.

Second, profitability, you’re absolutely right. Consumer beauty profitability moving better than expected. And the reason is very simple. When I talked every time about the virtuous cycle, we apply this approach for both segments. This is the case for prestige, but this is also the case for consumer beauty. So the recipe which is really improved the gross margin, this is something which is really absolutely in the DNA of consumer beauty teams, thanks to all the leaders [Indecipherable]. Sue rightly just mentioned that we have premiumizing all the new innovations Kind & Free, which is really a key element of the new innovation we are launching are really premiumized and really helping definitely the mix and the gross margin.

We are doing pricing in the current context, but I’m insisting every time in very granular manner and very detailed manner, so it’s very, very precise, and also optimizing cost of goods because rationalization of the [Indecipherable] platform, this is really a key element that we raised a few times that when we are doing a strong innovation, for example, on CoverGirl, we can use the same platform then to replicate on Max Factor and on Rimmel. And by doing [Indecipherable]. So that’s really the retail cycle. And then, of course, we are using this money to inject media and then A&CP. And you’ll remember this is what we did in Q3. Since you had the question what we did in Q3, our regular A&CP was rather high in consumer beauty roughly. This was a conscious decision to support all those initiative and then indeed now delivering sustainable profitability in consumer beauty. And obviously, we continue in fiscal ’23 and beyond.

Javier Escalante — Evercore Group LLC — Analyst

Thank you.

Operator

Our next question will come from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong — Raymond James & Associates, Inc. — Analyst

Thanks. Good morning. My first question is on fiscal ’23 EBITDA expectations. Nice to see continued strong margin expansion plan. It looks like you’re expecting about 200 basis points of margin improvement in the first half but flattish in the second half. So I was wondering if you could expand on that and what’s driving the first half versus second half expectations?

And then my follow-up question is around your view on celebrity influencer-led brands. It’s obviously a space that you have great color into. But it is becoming more and more crowded. So would love to hear your views in terms of relative success of your brand versus others, and how do these brands differ in terms of growth expectations and support levels relative to the rest of your portfolio? Thank you so much.

Laurent Mercier — Chief Financial Officer

Thank you. So I will take EBITDA — the first part on EBITDA expectation. And first of all, I really want to remind that on the metrics on top line and EBITDA, indeed in our fiscal year ’23 guidance is completely in line with the mid-term guidance that we gave you, you’ll remember, in November. So this is really confirming the robustness of the model and really the strong achievement in fiscal ’22. We continue fiscal ’23 in a very consistent manner. So definitely, also the [Indecipherable], but I would say it’s still a little too early to go more in depth between H1 and H2. So it is really definitely [Indecipherable] gross margin expansion, disciplined [Indecipherable] cost, investing in A&CP, and delivering this full year guidance. Now navigating H1 and H2, it may be something that we adopt during the year depending on evolution of all the metrics. So still too early to guide on this.

Sue Y. Nabi — Chief Executive Officer

Yeah. And then secondly — good morning. This is Sue. I’m going to take the second part of the question which is around celebrity and influencer-led brands. So if I ask another way, the question was around is it more competitive. The answer is clearly yes. This is a very, very competitive part of the business. I think all of us, we see a lot of brands launched on a daily basis [Indecipherable]. So it’s very, very competitive. I do believe that there is a place where there is a kind of moment of truth which is [Indecipherable]. There, there is a selection that’s happening because the ability to have a beauty market that’s strong as a Coty go-to-market to be present in hundreds if not thousands of stores globally. This is clearly an element that selects a lot of DTC brands as potentially becoming bigger brands, and by definition, makes the competition less important.

In terms of right level of investment, as you can imagine, these brands [Indecipherable] on social media, they have natural A&CP [Indecipherable] like this because of the reach of the different people who are reaching to their communities on a daily basis. And therefore, there is less need to overinvest in media like we do it on classical brands. So it’s really this kind of, I would say, a compromise that we need to find depending on the brand and depending on the kind of innovation.

Operator

Thank you. Our next questions will come from Chris Carey with Wells Fargo Securities. Please go ahead.

Chris Carey — Wells Fargo Securities, LLC — Analyst

Hi, good morning.

Laurent Mercier — Chief Financial Officer

Good morning, Chris.

Sue Y. Nabi — Chief Executive Officer

Good morning.

Chris Carey — Wells Fargo Securities, LLC — Analyst

So your new launch activity was a theme that came up throughout prepared remarks and a little bit in the Q&A session here. And a lot of focus was on the Kim launch in the front half. You noted that you’re at 20% of your full year sales expectations already. Is there any way you can frame what the contribution from the Kim launch will be to the outlook this year and in general what the contribution from new launches will be to your physical ’23 overall on sales and potentially on profit? Then I have a quick follow-up.

Sue Y. Nabi — Chief Executive Officer

Yeah. Thank you, Chris, for the question. So, again, when it comes to the first part, which is the contribution, as you can imagine, we do not share figures of how much this brand is going to contribute to the growth of the company. But clearly, the start of this new line is very good. We are above our expectations and something that’s for me and for all of us is a very, very strong sign is that the best-selling item is not a single product. The best-selling item is the full line of nine SKUs which is priced at $575. So for us each consumers are ready to spend $575 on a set of nine product. It means a lot in terms of how they trust — the brand, how they trust, what we are doing together on this brand. So this is clearly something that we wanted to share with you.

What I can tell you about the fiscal ’23 guide, it’s not dependent on this launch. It’s clearly very broad based and this is another item I would like to insist on a lot. It’s really that my job and Laurent’s job and the job of all these people at Coty is to build a growth that’s as balanced as possible. In terms of geographies, you’ve seen that, in fact, not being overexposed to China protected us recently. In terms of categories, we are working hard to make sure we have all categories in hand, so that whatever happening in one category or the other, we can accelerate in one category versus another. In terms of brands, not being independent on any brand. And clearly, this is something that’s a key element that is part of the way we are building the net revenues not only for fiscal ’23 but also into our algorithm that we presented to you a few months ago. Well, in terms of what are the key building blocks for our fiscal ’23, fragrance launches and category growth are clearly the biggest building blocks that we have embedded into this algorithm.

Chris Carey — Wells Fargo Securities, LLC — Analyst

Thank you, Sue. Just a quick follow-up would just be, Laurent, you did note some buckets of gross margin in the prepared remarks. It was also noted that Coty is expecting modest gross margin expansion for the year. I wonder if you could maybe just frame the cadence of gross margin expansion over the course of the year and then perhaps any of the key buckets, the puts and takes that you see there? Thanks so much.

Laurent Mercier — Chief Financial Officer

Yeah. So, first of all, let me remind, as we noted even, gross margin expansion in fiscal ’22 close to 400 basis points. So you can really see that all the actions, all the initiatives that we put in place delivered strong results.

Now definitely, we continue the journey. We still have some initiatives that we are implementing to continue gross margin expansion, definitely not at the same region as we had this year, and it confirms really, as I just shared, that we are very confident in moving to the mid-60s gross margin by ’25.

What are the ingredients? What are the buckets? So let me take the key elements. Number one is mix. Mix is a key driver of the gross margin. And again, we see concrete results of what we have achieved in fiscal ’22, which is really the premiumization of prestige fragrance segments and also makeup, and the next phase is the skincare, but also in consumer beauty. We, obviously, see all the new innovations that we are launching are margin accretive, and sometimes even at the same level of prestige. So it is a driver and we continue in fiscal ’23, and it’s part of the strategy and all the initiatives that we’ll be having.

Number two is definitely pricing, and I can elaborate a little on this because this is a key element. We implemented a low-single-digit price increase at the beginning of calendar ’22. We are currently, as we speak, implementing mid-single-digit price increase, and this implementation is going very smoothly. So there is no impact on volumes. And again, it’s really quality of execution. And we are also working on preparing a new round of price increase in low-single digit in the beginning of calendar ’23. So we are definitely, from a top line standpoint, really [Indecipherable].

Then on cost of goods, definitely, there is a strong headwind due to inflation. It’s about roughly slightly above 2% of net revenue. This is what we had in Q4, and we have the same assumption for fiscal ’23, okay, so it’s 2%. And also cost of goods, we have some strong and tangible actions which will help the gross margin.

Number one is we get the effect of the closure of the factory — fragrance factory in Germany. As you know, we announced 18 months ago this decision. We executed [Indecipherable] during the 12 months, and this was perfectly executed without any disruption. And we are now getting the savings starting now.

We are also working on performing value analysis, reviewing all the formulas, either consumer beauty or prestige and really with the objective to simply find the formula to standardize and also to have late differentiation. And by doing this, we are making savings in procurement but also in manufacturing. So these are really the elements of all the gross margin expansion. This is uncaptured in the all-including umbrella, and this will keep supporting gross margin expansion in ’23. And again, same flywheel to keep fueling all the key initiatives that we have in the growth agenda.

Chris Carey — Wells Fargo Securities, LLC — Analyst

Okay, great. Thank you, both.

Laurent Mercier — Chief Financial Officer

Thank you.

Sue Y. Nabi — Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question will come from Steve Powers with Deutsche Bank. Please go ahead.

Steve Powers — Deutsche Bank AG — Analyst

Yes. Hey, thanks, and good morning. Sue, maybe building on your comments earlier around balance across the portfolio, I was hoping you could frame for us in a bit more detail, just base case expectations in terms of the contributions from prestige versus consumer beauty within the ’23 outlook? And given the macro comments you made earlier and current momentum, I’m guessing prestige is to, again, be an amplified driver of growth, but perhaps you could just talk through the magnitude and sensitivities there, number one.

And then separately on China, just a little bit more specificity around your perspective on how that market is expected to grow in the year ahead? And just how dependent your own business is on resumed market growth in China at this point in its evolution in China?

Sue Y. Nabi — Chief Executive Officer

Yeah. Good morning, Steve. Thank you for your question. So let’s start with the first part, which is around how we are building in such fiscal ’23 growth. And I think part of the answer was in your question. As you can imagine, there is, what we call at Coty, the fragrance index that’s [Indecipherable], which is clearly about this category clearly supporting the growth of the beauty category not only in the U.S. but globally. This category is 20% above the levels of 2019 globally here again. And we see it continuing to premiumize to command higher pricing with a lot of innovations, either from our artisanal or niche brands or more mainstream brands. So clearly, this is going to hold us clearly during fiscal ’23.

Clearly, we will continue to execute on our makeup strategy — prestige makeup strategy. There, again, the brands that we are having in this area are growing superfast, and therefore, they are going to be key contributors even if the base is smaller. So by definition, in absolute value, it’s just a contributor, but still it’s a key one. And last but not least, we are, for the first time, starting to operate a full skincare line in China and thinking about Lancaster, but hopefully going to slowly but surely become a key contributor in our growth agenda.

So to see by nature because of the markets and because of the fact that we are adding categories is going to be in a way, a key contributor to fiscal ’23. I’ll remind you that the prestige business is 60% of our net revenues, while consumer beauty is more or less 40%. But we are also quite bullish on consumer beauty because we have incredible launches. Some of them started at the end of the quarter, beginning of Q1. I’m thinking about Thrill Seeker that started in U.K. behind the Rimmel brand that’s having fantastic start. It’s the first product that has been co-created 100% with TikTok in mind with TikTokers as not only creating the products but also part of the campaigns, holding and facing the campaign in front of consumers.

But also in the U.S. CoverGirl, we are activating one of the most powerful franchise behind CoverGirl, which is Simply Ageless. Simply Ageless is one of a kind line in the U.S. It’s really the only line that’s so modern in terms of approach, the question around age. It’s all about mixing beautiful skincare ingredients together with performing makeup ingredients. And this line, every time we put money and investment behind, we see it growing super, super fast, and we are also seeing it including recently in the most recent launches. So clearly, this is, I would say, the way we described how we have built fiscal ’22.

Now when it comes to China, what we are seeing is that — of course, there have been lockdowns, there have the pressure on consumption, including on ecommerce. But what we are seeing now two months out into the first quarter of fiscal ’23, at least for Coty, that the spike in our sales is back to, I would say, levels that are not the same as the ones we had beginning of calendar ’22, but very, very strong double-digit level.

So this is clearly something that we will count on. And again, for us, think about something quite simple. China is so small for Coty that anything we do, just doing the right things is a potential upside for the whole business there and therefore for the company.

Operator

Thank you. Our next question will come from Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Korinne Wolfmeyer — Piper Sandler & Co. — Analyst

Hey, good morning, and thanks for taking the questions, and congrats on the quarter. So I’d like to first push you a little bit more on what you’re seeing in color cosmetics. Now could some of the recent strength be coming from reopening and the summer season, having lots of weddings and events. So is there any way to parse out how much could be coming from the reopening and how much is more sustained strength going forward?

And then just touching on the recent Ant partnership that was announced, of course, we’re excited to hear that. But can you just expand a bit on what this partnership means for Coty? And how can we expect this to help the China in travel retail parts of the business ramp faster? And then any financial implications here that you can share with us would be great. Thank you.

Sue Y. Nabi — Chief Executive Officer

Yeah. Good morning, Korinne. Thank you for your questions. So let me start with the first part, which is around what we are seeing in color cosmetics, and how much of this is driven by reopening versus something that’s more sustainable, if I understood quite right, the question. So what I can tell you is that what we are seeing is on top of the strong categories that were booming during the lockdowns and post-pandemic, I think that anything that has to do with eye products, be it mascaras, brow products, lash growth serum, eyeshadows, etc., we are seeing the rest of the categories back to growth, including lip color. But not any kind of lip color. Interestingly, the launches that are doing the best at Coty, and specifically, think about CoverGirl in the U.S., it’s in the lip balms. Lip balms that probably are mixing the right things that people are looking for, which is on one side a hint of color and on the other side a lot of care. And this is for me a sustainable trend, if I may say.

And this is clearly going to be here to stand the test of time. There will be moments where people are going to look for more pigmented makeup, moments where they will look for less pigmented makeup. But whatever will happen, what I call skin side makeup or healthy makeup, whatever is the right name, this is the key trend behind the consumption of this category in the U.S. that we also see the same things more or less around the world in other regions.

Now when it comes to the partnerships that you are referring to between Ant and Alibaba, what does it mean for Coty and for the traveling momentum? We are, of course, studying the consequences of this partnership. The only thing I can tell you is that there is something very strong is that we are all waiting for the Chinese consumers to be back to travel. And therefore, to add on to the Travel Retail huge figures. Remember, I shared with you that Travel Retail is back to the levels pre-pandemic. But this is still with a minus 20%, minus 30% less passengers. so having all these consumers back to this channel can only confirm the importance of Travel Retail. And I can tell you that this partnership also means that Travel Retail and China are more or less telling us the same story and are extremely linked to each other.

Operator

Thank you. Our next question will come from Mark Astrachan with Stifel. Please go ahead.

Mark Astrachan — Stifel Financial Corp. — Analyst

Yeah. Thanks, and hello, everyone. First, just on marketing spend, ad marketing spend at 20% of sales in fiscal ’22, how do you think about where that goes in ’23 and beyond? Is there any particular benchmark you’re using? And then more specifically, it was up 600 basis points as a percentage of sales year-on-year; obviously, contributed to strong growth. But how do you think about the need to continue to increase that and the correlation to sales growth going forward? Thank you.

Laurent Mercier — Chief Financial Officer

Yes. So, hi, Mark. So indeed, as you saw in ’22, we were able to step up significantly our level of A&CP, and now to be in the range of high 20s. We are making very clear that high 20s is really for us is a accurate level and definitely within our flywheel. This is something that we are thinking also for fiscal ’23.

Now definitely, within high 20s is really the way. And again, the granularity is really how we spend the money. So definitely, it’s really the quality of execution. So we are more than able, focused on ROI. So definitely, the allocation of this money, everything is defined through ROI KPI, both in prestige and in consumer beauty. And definitely capturing the trend that Sue had just explained, and I want to dig also on the well-balanced footprints, because then we can allocate the money per geography in a balanced manner per category and also per brand. So this is definitely what we are doing and allocating per initiatives really per ROI.

Another element also because, of course, we are talking about percentage of dollars. That is also within A&CP, we have also some productivity and optimization initiatives. Definitely, if I take an element that we are calling other A&CP, which maybe is less visible. Of course, media is very visible. But there are also some other areas which, I would say, are nonworking where we have also [Indecipherable] umbrella, some strong productivity initiatives. I can just give you some examples like sample, testers, marketing materials, which are basically area where we have some optimization. But otherwise we have the same mindset. That optimization productivity we are doing on this line, we can reallocate in the working media and push definitely the business agenda.

Mark Astrachan — Stifel Financial Corp. — Analyst

Great. And then…

Operator

Thank you…

Mark Astrachan — Stifel Financial Corp. — Analyst

Hello?

Laurent Mercier — Chief Financial Officer

Yes, we are here.

Operator

Yes, go ahead.

Mark Astrachan — Stifel Financial Corp. — Analyst

Okay, great. I thought I got cut off there. I wanted to ask about just how to think about margin profiles across the prestige businesses. Any material differences in thinking about the license versus wholly-owned brands and by category, makeup, skincare versus fragrance? Thank you.

Laurent Mercier — Chief Financial Officer

No. There is — and we don’t enter this level of detail, but what I can tell you again is that, of course, prestige gross margin, as you know, is higher than consumer beauty, so this is a fact. But again, as I shared several times, the gross margin agenda is valid for both segments. To elaborate a little more, we definitely better for consumer beauty, definitely that all the initiatives that we are making, so prestige makeup, e-commerce, but also geography, we mentioned about China, all these initiatives are really driving gross margin accretion. So this is really the way we are taking the gross margin agenda.

Sue Y. Nabi — Chief Executive Officer

Thank you, Laurent. Thank you, everyone. So again, thank you, Mark. So again, we are ending the call right now. Super happy again to report these results, again, best-in-class results, and we hope to talk to you soon about what’s happening in Q1. Thank you so much.

Laurent Mercier — Chief Financial Officer

Thank you. Bye-bye.

Operator

[Operator Closing Remarks]