Coty Inc Q2 2026 Earnings Call Transcript

Coty Inc (NYSE: COTY) Q2 2026 Earnings Call dated Feb. 05, 2026

Presentation

Olga Levinzon — Senior Vice President, Investor Relations

Cody, Senior Vice President of Investor Relations thank you for joining us today for the prepared remarks portion of COTI’s second quarter fiscal 2026 earnings. On Friday, February 6, 2026 at approximately 8:00am Eastern Time or 2:00pm Central European Time, we will hold a separate live Q and A session on our results which you can access via our Investor Relations website. Joining me for our presentation are Marcus Strobel, COTI’s executive chairman of the Board and Interim Chief Executive Officer, and Laurent Mercier, Coti’s Chief Financial Officer. Before I hand the call over to Marcus, I would like to remind you that many of the comments today may contain forward looking statements.

Please refer to Cody’s earnings release and the reports filed with the SEC where the company lists factors that could cause actual results to differ materially from these forward looking statements. In addition, except where noted, the discussion of Coti’s financial results and Coti’s expectations reflect certain adjustments as specified in the Non GAAP Financial Measures section of the Company’s release. Thank you. I will now turn it over to our Executive Chairman and Interim Chief Executive Officer, Marcus .

Markus Strobel — Executive Chairman and Interim Chief Executive Officer

hello everyone, My name is Markus Strobel and as you have seen, I officially joined Cody on January 1st as the Executive Chairman and Interim CEO. Today is my 36th day on the job. Let me tell you, these days have been pretty intense. I had the chance to conduct in depth business reviews, visit some of our biggest markets like the US and the uk, see our technical centers and review our R and D capabilities. I managed to speak to some of our key customers and most importantly met with many of our talented, beauty minded and passionate people.

All this has given me a good sense of the business and a fundamental understanding of our challenges and opportunities. Since most of you don’t know me, I thought I’d give you a quick summary of my background. I spent the last 33 years at P and G and I retired a year ago in 2024. The vast majority of my time at PNG I had the pleasure of working in a variety of beauty categories, skin care, hair care, personal care as well as almost 10 years working on fine fragrances. In the last seven and a half years I was the President of the Skin and Personal Care Division globally around out of Singapore with brands that you may know like SK ii, Olay, Old Spice and Native Fun Fact.

In my early years working in fragrances I was in charge of transforming Hugo Boss from a small local fragrance brand into a global success and one of the ways we did this was by spearheading the launch of the Boss Bottle franchise. Fast forward to today as I joined Cody. Hugo Boss is now the largest brand in the portfolio and with Boss Bottle beyond as this year’s blockbuster launch, it feels like I’ve come full circle and the task at hand now is to apply all my experience, both the extensive duty experience but also the operational data driven discipline to help the Coty organization focus and succeed in the beauty market of today and tomorrow.

COTY has accomplished a lot in the last five years. The organization significantly strengthened its fragrance innovation and execution capabilities. Growing prestige Fragrance business at 10% CAGR from fiscal 21 to fiscal 25 is no small feat. Cody revamped the brand equities of the major consumer beauty brands while modernizing consumer engagement and the innovation pipeline. The company grew gross margins by close to 500 basis points and deleveraged the company by over four turns in that time. These are major accomplishments and the team should be very proud of the progress made. Even though I’m still only a month into understanding the business and assessing the portfolio, it is already clear that Coti has outstanding assets, capabilities and competitive advantages that will position it to succeed in beauty, but if and only if they are paired with the right operational discipline.

First, Coty has leading and highly desirable fragrance brands like Hugo Boss, Burberry, Marc Jacobs, Chloe. Coty significantly grew each of these brands between 30% and 140% from fiscal 19 to fiscal 25, and there remains substantial room to expand them further. Second, after visiting our Fragrance R D Center of Excellence in Geneva, meeting our leading perfumers, understanding our cutting edge compositions and seeing our proprietary testing, I’m convinced that Coty has stellar fragrance innovation capabilities. Third, I’ve spoken to the various global and local teams and I’m very impressed by the amazing creativity and entrepreneurial spirit across the organization.

And finally, Kodi’s vertically integrated model, particularly in fragrances, is a real differentiator and a competitive advantage, enabling Coti to translate our internal R and D and global commercial scale into winning propositions across our multi tiered fragrance portfolio. But as they say, if you’re so smart, why aren’t you rich? There is no denying that Coti’s financial results in the past 18 months have been disappointing. The stock has also been hovering around at $3 for several months, which I see as a signal that investors are skeptical about Coti’s long term ability to compete in beauty, sustain fair market share and deliver consistent profitable growth.

Both things are true. COTI has outstanding assets and capabilities we have not been delivering at the level that we should. My takeaway is simple. Our business imperative is to leverage our collective brainpower and competitive advantage to deliver the financial and operational performance that reflects COTI’s potential. COTI has breath. Breath can be a strength, but only when it is curated. This is the foundation of our new strategic framework. COTI curated at its core, this means focused investment and sharper priorities. COTI curated is about making big, even bigger, scaling what wins, stopping what dilutes and removing layers that slow execution.

Ultimately, success hinges on disciplined execution, operational effectiveness and sufficient multi year marketing support. Let me illustrate how complexity quietly dilutes impact. Today at COTI we sell more than 40 brands across dozens of markets. This results in over thousand possible brand and market combinations, highlighting the significant complexity we manage. The risk is clear. When resources are stretched across too many permutations, our core brands may not get the consistent, concentrated support they need. This manifests in the following without adequate support, our top initiatives don’t reach their full potential in the markets that matter most. The largest, highest growth potential markets where impact should be the greatest.

The creativity of the COTI organization is amazing and we can create beautiful and cutting edge assets. But too often we create too many new assets across too many brands and too many markets. A disproportionate amount of our spending gets tied up in asset creation and not enough flows into working media and consumer engagement which can lead to insufficient awareness, trial and purchase. And finally, strong year one initiatives may often lack sufficient year to support because we are allocating too many resources to new product launches. So many activities, so many projects, but very few make a real difference.

So how do we break this cycle? We will place a much stronger focus on our top markets, brands and initiatives, ensuring they are sufficiently funded and grow year after year. We will refocus investment on the core, ensuring that the more supports the core through built in halo effects. These insights are not revolutionary, but they are fundamental to every beauty and consumer business that delivers long term success. Fewer assets, better execution, bigger propositions, the more supporting the core. We will share more details about COTI curated in the coming quarters. Let me share a few examples of what this looks like in practice.

Focused on our biggest brands and biggest markets, it’s only fitting to begin with Hugo Boss Hugo Boss is COTI’s biggest brand in the portfolio and despite its scale size, Kodi has grown this brand by over 30% at constant currency since fiscal 19, a testament to how the strategy is broadly working. Boss Bottle beyond, launched this past fall, is a top notch innovation and is already ranking as the number two innovation in key markets. Its strong momentum has driven market share gains for the iconic Boss Bottle franchise in all major markets markets including Germany, uk, Spain, France, Canada and Mexico.

Importantly, by leveraging Boss Bottle beyond to unlock the US Market for the Hugo Boss brand, the innovation has already captured 90 basis points of share in the US. These achievements highlight the strength of COTI’s innovation, creativity and marketing capabilities. But without sufficiently strong operational discipline, the success of Boss Bottle beyond did not translate into the growth of the broader Hugo Boss brand in the past two quarters. The launch did not generate enough Halo impact on the other core Hugo Boss franchises like Boss Descent. This is not rocket science, which is why we are putting in place a more holistic plan for next year with continued support and co merchandising around Boss Bottle Beyond, a broader brand level halo strategy and sustained reinforcement of the core business.

We’ve seen similar puts and takes in our largest market, the U.S. as shared in recent quarters, underperformance in the U.S. market in both divisions accounted for nearly all of COTI’s fiscal 25 sales decline. The company has taken actions in calendar 25, including a new leadership team, new organizational structure and increased marketing support. However, the results in the last couple of quarters have been inconsistent. There are many things that are working well in the US we have several scaled leading fragrance brands just as Burberry and Marc Jacobs. With several female franchises like Burberry Hair and Marc Jacobs Daisy ranking In the top 15, we are strongly outperforming in the Prestige Makeup category led by Momentum and Kylie Makeup.

On the retail side, we are strengthening our position with growing customers as a result of a strong partnership with Alta. They are now one of our largest retail partners and we are outperforming with them. Similarly, we are delivering best in class execution in the critical Prestige E Commerce channel with strong double G growth in the first half, Amazon is now a leading beauty retailer in the US albeit with a smaller position in prestige fragrances. We are proud to have grown Coty’s fragrance sales on Amazon by over 30% fueled by our existing brands and a successful launch of Marc Jacobs fragrance on Amazon in July.

And importantly, our efforts on the TikTok shop in both the US and the UK are driving Halo for our brands in both E Commerce and Brick and Mortar. So while many areas of the US business are working well, results during the critical Q2 holiday period were below our expectations. We saw three key areas of pressure. First, the prestige fragrance market slowed from 7% growth in Q1 to approximately 3% growth in Q2 with much of the consumer purchasing concentrated at the very end of the quarter. Second, we saw very aggressive promotional activity in prestige fragrances during the holiday season.

This not only suppressed broader US Fragrance growth, but also the profit contribution from this key market. And third, our performance versus the market has been inconsistent and prestige fragrances after lagging the market by 5 to 7% in prior quarters, our fiscal Q1 sellout was in line with the market. However, in Q2 our sellout was flattish, underperforming the market by several points in the critical fragrance category. In consumer beauty, we continue to see a large gap in our sellout performance relative to US Mass cosmetics category, though the recent changes we implemented are starting to show some modest improvement.

The root cause of this underperformance comes back to the same themes focus, making choices, prioritizing investment and operational discipline over the past couple of years in both prestige and consumer beauty, Cody has funded too many projects and initiatives. As a result, high potential core franchises didn’t receive sufficient investment or organizational focus. Too much emphasis was placed on launching new innovation and not enough on the core business. The challenge was most acute in mass cosmetics where our SKU count in seasonal innovation bundles kept increasing, resulting in less productive SKUs replacing more productive SKUs on the shelves in addition to incurring more costs from returns.

The good news is that we are clear on our priorities from here. We are actively shaping the US Playbook for both prestige and consumer beauty to first of all continue winning where we are already strong and second, concentrate media support in store execution and organizational focus behind the brands, franchises, retailers and channels that will move the needle and deliver sustainable sellout growth. Burberry continues to be a standout performer in our portfolio. We have grown Burberry by more than 140% between fiscal 19 and fiscal 25, a testament to the strength of the brand and the discipline of our execution over time.

Over the past six years we built three core fragrance franchises, Burberry Her, Burberry Hero and Burberry goddess and in Q2 each grew by a mid single digit to double digit percentage like for like and importantly, Burberry continues to steadily strengthen its position. Burberry’s global fragrance ranking improved from number 30 in 2019 to number 15 in 2025. In female fragrances specifically, Burberry is now within the top 10, up from number 27 in 2019, a remarkable step change in just a few years. Complementing fragrances, Burberry Maker also delivered high single digit growth in Q2, reinforcing the brand’s ability to perform across categories.

Let me move to another example of what’s working well Marc Jacobs. We are seeing continued momentum in key franchises like Perfect. We also saw exceptional performance from the Daisy Murakami Limited Edition collection which exceeded all expectations and rapidly sold out in the US we are excited to roll out this launch into additional markets in the coming months. The launch of Marc Jacobs on Amazon last summer has been highly incremental. In fact, the Amazon launch has supported growth across other channels including brick and mortar with Marc Jacobs US Total sellout growing double digits since the launch.

Looking ahead, we are excited to launch Makeup under Marc Jacobs Beauty in mid calendar 2026. This combination of strong core franchises, high impact innovations and presence in top markets and key channels illustrates why disciplined momentum building is central to our strategy across the portfolio. Kylie Cosmetics is another example of what is working well in the second quarter. Kylie delivered strong like for like sales growth. Fragrance sales more than doubled year over year led by the Cosmic franchise and the brand’s entry into fragrance mists. Makeup sales also grow at high single digit rate thanks to momentum in lip products and the viral social media success of the skin tint blurring elixir.

Total Kylie Cosmetics brand sellout growth in Q2 was more than 20% supported by strong momentum in both makeup and fragrance. In recent weeks we launched the next fragrance iteration Cosmic Kylie Jenner Intense and this innovation is off to an exceptional start well ahead of our expectations. And as a further proof of the brand’s global resonance and Kylie’s own influence, Kylie Cosmetic Ranked number two among all beauty brands in calendar 2025 in social media engagement through creator led strategies by both Tracker and Cosmetify. Moving to our mass fragrance business the broader COTI issue of pursuing too many small projects adding complexity without moving the needle is also evident here.

Smaller lifestyle fragrance initiatives have diverted focus and resources from core brands, reinforcing the need to focus and streamline the portfolio. We will discontinue small fragrance initiatives and halt new projects that have been in development, particularly as many of these projects did not resonate with retailers and consumers. Instead, our focus will be on amplifying core brands like Adidas, Bruno Banani, Max. In fact, Adidas fragrances grew at double digit pace in Q2. The new Adidas scenting platform, Adidas Vibes is performing well in a number of regions, particularly emerging markets like Central and Eastern Europe and Southeast Asia.

But that strength is not yet consistent globally and we are working to accelerate its performance across markets across coti. Our AI journey is accelerating and we’re already putting real foundations in place. Though, it’s just the tip of the iceberg of what AI can do for our business. Building on our strong, sizable AI partnership with Microsoft and ServiceNow, our new strategic collaboration with OpenAI expands our AI ecosystem to support focused applications including advanced consumer Persona insights. We’re actively creating digital assets using generative AI, helping us reduce spending, compress timelines and generate more content while still in the early stages of implementation.

Through AI, we’ve reduced the post production asset cost for selected fragrance, cosmetics and skincare brands by 70 to 90%. We’re also preparing for machine buying through Generative Engine Optimization. We’re beginning to influence how our brands are represented and recommended across AI engines, an increasingly critical gateway for consumer discovery. But perhaps most importantly, AI at COTI isn’t just about the tools, it’s about our people. Through targeted training, hands on workshops and leadership engagement, we are building an organization where AI becomes part of our employees day to day, strengthening execution today and creating a future ready COTI now that I’ve shared my very initial assessment of COTI’s portfolio capabilities and playbook, it’s fair to ask now what? What does this mean for COTI’s overall strategic direction? I don’t have all the answers today and I will come back to you in the coming quarters with a comprehensive strategic overview of and financial roadmap for the coming years.

But in the meantime, there are some decisions I’ve made with the support of the board. First, we will continue with our strategic review of consumer beauty as shared last quarter. Under the leadership of Gordon Von Bretten, we’re activating the Color the Future Performance Improvement Plan to return coty’s consumer cosmetics business to growth and profit expansion over the next one or two years. Laurent will share an update and call it a future shortly. While delivering the full results of the plan will take some time, I believe this is the right strategic decision for COTI as the successful execution of the plan will unlock shareholder value regardless of the ultimate decision on the brand portfolio with value opportunities in both the short and the long term.

The second portfolio decision is around lifestyle scenting. While we will pursue closer coordination across our full fragrance portfolio in R and D and consumer insights, we have decided that lifestyle fragrances will remain under consumer beauty to ensure continuity in commercial activities and marketing support. Third, given our focus on scale reach and profitability, we have made the decision to end our license with the Auvida skincare brand. And finally, in a similar vein, we will also be reviewing our tail frequency initiatives with a focus on the smaller geographically dispersed activities. Now let me hand the call over to Laurent to discuss our financial results and outlook.

Laurent Mercier — Chief Financial Officer

Thank you, Markus. As Markus has discussed, we are navigating a complex external environment while in parallel working to instill greater focus and operational discipline across the organization. Let me provide some context on the broader beauty backdrop and our in market performance. In Q2, the prestige beauty market grew approximately 5% while still solid growth. This indicates some sequential slowing from the roughly 6% growth in Q1. The slower growth was evident in prestige fragrances with a category moderating from 5% growth in Q1 to 3% in Q2. With modest growth in both units and price mix in prestige fragrances, there was some incremental slowing in the US and in certain European markets like Germany and the uk.

Against this backdrop, our total sellout was broadly flattish, though this included weaker than category sellout in key markets like the us, Germany and the uk, largely balanced by strong sellout in emerging regions like Asia Pacific, Middle East, Latin America and travel retail. On the revenue side, our prestige net sales declined by 2%. Like for like, the gap between our relatively stronger sellout and weaker selling was primarily driven by elevated promotionality in the market which pressured our gross to net. On a gross sales basis, selling was broadly aligned with sellout, indicating that the estimated inventory destocking headwinds we experienced over the past year meaningfully reduced this quarter.

In consumer beauty, the market grew by 5% in the quarter. As in recent quarters, our challenge in consumer beauty remains a sizable gap between our sellout and the market. While our selling remains broadly aligned with our sellout, our total Q2 like for like sales improved sequentially to down 3%. At the better end of our minus 3% to minus 5% guidance, we estimate that we have significantly reduced prestige trade inventory in Q2 and are tightening the gap between sell in and sell out. At the same time, Top line was held back by slower category growth and continued market share underperformance in several of our key markets including the US, UK and Germany.

In prestige like for like, sales were down 2%, an improvement from down 6% last quarter. As discussed, several counteracting forces are at play. On the one hand, we estimated impact from retailer destocking has significantly reduced and our innovation overall is contributing more strongly to the top line growing double digits versus last year. On the other hand, the prestige fragrance market growth has slowed by a couple of percentage points while simultaneously becoming more promotional with aggressive discounting activity during the holiday season. It is also worth noting that the complexity in the business driven by too many launches and initiatives contributed to service issues in the prestige business during Q2.

To address this, we are increasing our inventory behind core SKUs to improve service in the coming months. In consumer beauty like for like sales declined 6%, an improvement from an 11% decline in Q1. We are orienting our innovation pipeline towards the highest growth face sub segment including highlighters, bronzers and tints. Our market share gaps in the US and Europe continue to weigh on selling and while we are focused on turning around our color cosmetic business, this work and closing our share gaps will take time Specific to Consumer Beauty Cosmetics As Markus mentioned, we have begun implementing our Color of the Future Performance Improvement Plan with the Consumer Beauty Leadership Team now in place and fully accountable for the P and L.

The team has begun to put the plan into action including first, reallocating ANCP from non working media and asset production to consumer engagement investments behind core parts of the business like CoverGirl US and Remail UK second, streamlining the fiscal year 27 innovation pipeline to ensure a tighter, better supported and more targeted innovation bundle designed to hallow on our core brands, improve door productivity and drive margin accretion third, doubling down on procurement savings initiatives across various categories including merchandising and media fourth, refining brand equities and positioning across the entire color cosmetics portfolio to ensure each brand has a clear, differentiated point of view with its core consumers and finally, executing more locally relevant disruptive 360 degree activations to strengthen brand visibility and engagement in our key markets.

Next steps in the coming months include reinvesting behind key icons, activating evolved brand equities, leveraging AI to scale content creation at a fraction of the cost and re examining the full value chain. It is worth noting that some of these actions were part of our consumer beauty turnaround five years ago, including revamping brand equities, platforming innovation and streamlining SKU count. While these interventions helped stabilize and grow consumer beauty several years ago, operational discipline has slipped across the organization over the past two years. For example, the number of SKUs in our annual CoverGirl innovation bundle has almost doubled in recent years, significantly increasing cost.

We have already materially reduced the SKU count in the fiscal year 26 spring innovation bundle to focus on the highest potential launches and Our fiscal year 27 plans include further streamlining in the CoverGirl Innovation SKU Count with Gordon leading end to end. The goal is to reinstate the operational discipline and introduce more transformational full value chain change so that progress is durable. While still early in the transformation plan, we have seen some early green shoots for CoverGirl, we have focused marketing, activation and investment behind the top franchises Simply Edgeless and Lash Blast, and as a result these franchises have seen improved retail sales trends.

Sellout has improved from a high single digit decline in the last 12 months to a low to mid single digit decline in the past three months. For RIML with culturally relevant locally executed activations, sellout has improved from a mid single digit decline in the last 12 months to a low single digit decline in the past three months and closing the gap to the category. Our adjusted gross margin was 64.2%, a 260 basis point decline from the prior year. While we expected adjusted gross margins to decline more sharply in Q2 than in Q1, the decline was worse than anticipated.

In Prestige, the promotional environment intensified as we moved through the holiday period, creating a more significant headwind than expected. In Consumer beauty, we faced fixed cost under absorption from lower volumes and mix headwinds from weakness in the higher gross margin. US Business coupled with stronger growth in the lower gross margin. Brazil business tariff impacts were also higher than in Q1, though broadly in line with our expectations. Importantly, based on the current external environment, we expect each of these pressures on our gross margins to persist in the second half of fiscal year 26. As these margin pressures flowed through the P and L, we made some adjustments to our ANCP investments, though not to the same extent as the decline we saw in our underlying revenue trends.

In Q2, ANCP was approximately 27% of net revenues consistent with the prior year, demonstrating our ongoing commitment to invest behind core brands. Adjusted EBITDA was 330 million, down 15% year over year at the lower end of our guidance range for a low to mid teens decline. The decline primarily reflected top line pressure and lower gross margins. The quarter also included a few million dollars expense related to the CEO transition. Our adjusted EPS excluding the equity swap was in line with expectation at $0.33 for the first half and $0.18 in Q2. In Q2 we generated fixed cost savings of over 10 million in addition to approximately 40 million in productivity savings.

We continue to expect about 200 million in cumulative savings in fiscal year 26. These savings provide us with the flexibility to reinvest in growth and offset inflation and also cost pressures. Despite the challenged top line and profitability landscape, we delivered significantly higher free cash flow in the first half of 524 million, which was well above our guidance of more than 350 million and above last year’s first half free cash flow of 411 million. The stronger than guided Free cash flow was driven by better receivables performance and the phasing of working capital which benefited Q2 and will reverse in Q3 on a year over year basis.

Free cash flow also benefited from the absence of cash bonus payments tied to fiscal year 25 company results. We also completed the divestiture of Vela right in line with our original commitment to divest our financial stake by the end of calendar year 25. This generated 750 million of upfront proceeds with the potential to receive proceeds from a further sale or an initial public offering of the business after KKR’s preferred return has been met. As a result, we ended the quarter with net debt of 2.6 billion and leverage of 2.7 terms, the lowest levels for both metrics in more than nine years.

We remained committed to bringing leverage closer to two terms over time through both organic and inorganic levers. Now let me discuss our near term outlook with Marcus new to Coti and only one month into the role, he needs time to fully immerse himself in the business, understand the underlying dynamics, refine our strategic priorities and align with the Board. Given this leadership transition, it will be premature to issue full second half of fiscal year 2026 guidance at this stage. As a result, we are withdrawing full fiscal year guidance which had been previously given for EBITDA and free cash flow.

However, we do want to offer visibility for Q3. For Q3 we expect like for like revenue trends to decline mid single digits driven primarily by bigger declines in consumer beauty. We see differing drivers across prestige and consumer beauty. In prestige, we estimate the fragrance market will grow low to mid single digits consistent with Q2 and in line with a broader beauty market. While we estimate that the headwinds from retailer destocking significantly reduced in the quarter, the promotional environment intensified as we move through the holiday period and remains elevated which is a headwind to net sales and by extension gross margin.

We are refining investment allocation behind key priorities and strengthening execution playbooks as we work to improve market share over time in several key markets. Finally, in the coming weeks we will be launching a key female fragrance initiative under Calvin Klein. For Consumer beauty, we expect the mass beauty category to be flattish to up low single digits driven by E commerce. At Coti, we are beginning to implement the Color the future Performance Improvement Plan for Color cosmetics which will narrow our sellout gap with the market over time. This includes accelerating in E commerce where COTY is currently underrepresented.

In the near term, our sellout gap to the cosmetics category will weigh on our results. With shelf space broadly stable through spring resets, we are seeing early green shoots in sellout trends in focused brands like Remmel Globally and Kickover Girl franchises. At the same time, we anticipate weakness in lifestyle fragrances as we streamline small initiatives. Considering the mid single digit decline in like for like sales, we expect a more significant decline in profitability. Specifically, we see EBITDA declining to 100 to 110 million in Q3 fiscal 26 compared to 204 million in Q3 fiscal 25. This decline reflects both external factors and our deliberate decision to protect the marketing investments needed to reignite our market share in both divisions.

First, we expect the lower sales at constant currency to drive approximately one third of the EBITDA decline. Next, another third of the EBITDA decline is driven by the expected 200 to 300 basis points gross margin decline. Similar to Q2, this is driven by the same lower sales and unit volumes negative mix as key profit regions remain under pressure, a highly promotional environment, Tariff impacts and Forex Headwinds on Cogs we continue to expect a net impact of under 40 million from tariff in fiscal year 26. Third, another sizable headwind to profit relates to fixed cost, where ongoing progress on fixed cost reductions is more than offset by the mechanical impact from last year’s variable compensation accrual release, something we had anticipated and have highlighted in recent quarters.

The final major driver is our decision to protect our marketing investments behind our key brands and to sustain support for recent and upcoming launches. As we reach media sufficiency on these key franchises, we will reallocate investment away from smaller projects that have added complexity without benefiting the COTI P and L. We will be disciplined and pragmatic in the pace of these reallocations. Inevitably, we expect this to result in some lost sales and higher returns in the near term, which is part of the sales equation for the coming quarters. It is also worth flagging that Forex is expected to be broadly neutral to our Q3 EBITDA as a benefit on sales will be broadly offset by a headwind to our cost.

With these various moving parts across the P and L. Let me give our Precise outlook for Q3. We expect like for like sales to decline by a mid single digit percentage primarily due to weakening trends in consumer beauty. At current exchange rates, we expect Forex to to be a benefit of low to mid single digits. We see gross margins declining between 200 to 300 basis points year over year consistent with what we saw in Q2. Given the declining gross margin, the mechanical impact to fixed cost and our commitment to protect ANCP. We expect EBITDA of 100 to 110 million.

We are upholding our commitment to protect ANCP investment, especially behind our core franchises, including continued support for Boz Bottle beyond, strong support for the upcoming launch under Calvin Klein and the exciting launch of Makeup and the Marc Jacobs Beauty in mid calendar year 26. In Q3 we expect interest expense to be in the low 40 million level and we remain on track to reduce fiscal year 26 interest expense by close to 40 million versus last year to the low 170 million level. With significant debt reductions executed to date. We expect interest expense to decline further in fiscal year 27.

Altogether. This translates to approximately breakeven Q3 adjusted EPS excluding the impact from the equity swap. Finally, we expect cash outflow in Q3 reflecting normal seasonality of the business, the phasing of working capital which benefited Q2 at the expense of Q3 and roughly 30 million in cash taxes related to the Vela sale in December. Please note that we anticipate the remaining approximately 30 million in cash taxes related to the Vela divestiture to be paid in Q4. With that, let me turn it back to Marcus for concluding remarks.

Markus Strobel — Executive Chairman and Interim Chief Executive Officer

Thank you Laurent. Let me briefly summarize what you’ve heard today. One month into the role, I’m convinced that Cody has amazing initiative, amazing assets and amazing people and it’s equally true that we are not yet performing at the level we need to be. Cody has missed expectations for the past 18 months. Both things are true. With this leadership transitioning opening a new chapter in coti’s storied history, I’m committed to a few core principles. First, we will provide a realistic and balanced view of the business, sharing what’s working, what’s not working, but where we are making progress and what’s not working and we will cease.

Second, we will provide realistic and balanced short and long term financial targets, which Today means our Q3 guidance but will become longer term in nature over time. Third, we will focus the business, make deliberate choices and optimize investments, all with the goal of delivering consistent, profitable growth over the medium term. Our North Star will be consumer demand with a relentless focus on sellout and market share. And finally, we will continue to review the portfolio to identify the best ways to unlock shareholder value both in the near and the long term, complemented by other value driving opportunities.

We will follow up by the end of fiscal 26th to share an initial, more detailed view of our strategy, our focus brands and markets and our portfolio. I look forward to meeting many of you in the coming months and quarters. To conclude, I’m confident that things at Coti will get better. It won’t happen overnight, but it will happen.