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Consumer Beauty Hurts Coty: Can Efforts Revive Lost Sheen?

Zacks Equity Research

Coty, Inc. COTY is sailing on rough seas, thanks to persistent weakness in the Consumer Beauty segment as well as supply-chain disruptions. Let’s take a closer look at the aspects that are tarnishing the image of this beauty company and the efforts being undertaken to achieve growth.

Consumer Beauty Segment is a Drag

We note that the Consumer Beauty segment has been posting soft organic sales since the past few quarters. The segment was under pressure in the third quarter of fiscal 2019, with revenues declining 17.8% and like for like (LFL) or organic sales falling 10%. Results were hurt by supply-chain disruptions and changes in revenue recognition accounting.

Also, persistent softness in mass beauty categories in the United States and Europe dented results. Moreover, performance of Younique was dismal during the quarter. Though management is working toward enhancing the segment, full recovery may take time.

Other Aspects Weighing on Performance

Apart from the Consumer Beauty unit, the Professional Beauty segment is lacking sheen. Revenues in the category declined 6.1% year over year in the third quater, due to disruptions at Coty’s North American warehouse and reduced trade inventory for certain customers.   

Additionally, Coty has been struggling with supply-chain hurdles for a while. These headwinds persisted in the third quarter, wherein the top line fell 10.4% year over year. While the company is on track to mitigate supply-chain issues, it is yet to be fully offset. We note that these headwinds have weighed on the stock. The company’s shares have inched up 1.8% in the past year compared with the industry’s increase of 10.1%.



 

Will Efforts Revive the Stock?

The company is on track with building and streamlining operations, upgrading systems, optimizing manufacturing and logistics as well as simplifying overall operations. Simultaneously, the company focuses on investing in brands and transforming digital capabilities to drive growth.

Apart from these factors, the company is gaining from strategic acquisitions. In fact, the buyout of the Burberry brand, concluded in the second quarter of fiscal 2018, is boosting growth in the  Luxury segment. Speaking of the Luxury unit, strong brands and consumer demand are an upside in this category. We expect such prudent efforts to boost the performance of this Zacks Rank #3 (Hold) company in the forthcoming periods.

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