Consumer Beauty Unit Hits Coty, Luxury Offers Some Breather
Coty Inc. COTY has been bearing the brunt of persistent softness in the Consumer Beauty segment. Notably, the unit (which accounted for more than 46% of Coty’s top line) remained under pressure in the fourth quarter of fiscal 2018, wherein organic sales dropped due to supply chain disruptions, Brazilian trucker strike and persistent softness in the mass beauty market in North America and Europe. Although management is working toward strengthening the segment, full recovery is likely to take time.
In fact, supply chain disruptions and higher freight expenses also caused Coty’s adjusted gross margin to contract 20 basis points in the last reported quarter. Moreover, the company expects supply chain disruptions due to logistics and manufacturing consolidation to weigh on its performance in first-quarter fiscal 2019, with a modest effect in the second quarter. This combined with its brand rationalization program is likely to result in a low-teen year-over-year decline in adjusted operating income for the fiscal first quarter.
Nonetheless, Coty’s Luxury and Professional Beauty segments have been performing impressively for quite some time now, mainly backed by solid brand performances in key markets. In fact, these units continued to deliver impressive results in the fourth quarter, leading to organic revenue growth for the company. During the fourth quarter, net revenues from the Luxury unit rose 14.6%, with organic revenue growth of 5.3%. This uptick can be primarily attributed to strength in Gucci, Tiffany TIF, philosophy, Chloe and Marc Jacobs brands.
Further, the segment witnessed strong performances in Europe and North America in the quarter, courtesy of growth in the United States, the U.K., China, France, Latin America and solid travel retail sales. Travel retail has lately emerged as a lucrative growth platform in the beauty arena.
Apart from Coty, we note that Estee Lauder EL has been undertaking efforts in the travel retail platform. Also, the Professional Beauty segment depicted a stellar show backed by higher revenues from the OPI brand as well as strength in North America and ALMEA. This helped sales at the unit to rise 5.4% year over year in the last reported quarter. Moving ahead, management plans to continue bolstering performances of the Luxury and Professional Beauty segments by tapping the opportunities provided by brands in these categories.
Meanwhile, Coty, which shares its space with Helen of Troy HELE, has made several strategic acquisitions to enhance its brand portfolio. In the second quarter of fiscal 2018, the company concluded the buyout of the iconic Burberry brand, which fueled Coty’s Luxury segment performance in the third quarter itself.
Although weakness in the Consumer Beauty segment has been eclipsing the company’s performance, we expect solid yields from Luxury and Professional units along with other efforts to offset the aforementioned hurdles and help drive growth.
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