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Coty Picks Up Steam, Stock Rallies 59% Since Q2 Results

Zacks Equity Research

Coty Inc. COTY, which was in the red zone for quite some time, has seen a spectacular revival lately, thanks to its better-than-expected second-quarter fiscal 2019 results. Notably, the company, which belongs to the Cosmetics industry, has seen its shares rally as much as 58.7% since its earnings announcement on Feb 7.

This has helped this Zacks Rank #3 (Hold) stock surge close to 40% in the past three months compared with the S&P 500’s growth of nearly 4%. So, let’s take a look at Coty’s outcome and see if its growth drivers can help the company retain the momentum amid hurdles.

Coty Inc. Price, Consensus and EPS Surprise

Coty Inc. Price, Consensus and EPS Surprise | Coty Inc. Quote

Luxury Unit Remains Strong in Q2

In second-quarter fiscal 2019, Coty’s adjusted earnings of 24 cents per share surpassed the Zacks Consensus Estimate of 22 cents. Also, revenues of $2,511.2 million came ahead of the Zacks Consensus Estimate of $2,472 million. During the quarter, Coty’s Luxury unit continued to deliver a strong show, primarily backed by solid brand performances, innovations and strong consumer demand.

Net revenues in the segment rose 7% to $1,017.5 million, while LFL revenues improved 10.8%, driven by the inclusion of Burberry and growth in core portfolio. Further, the category witnessed growth in brands like Gucci, Tiffany, Chloe and Calvin Klein. Adjusted operating income in the category came in at $176.9 million, up 41% on the back of revenue growth and fixed cost reductions. Management is committed toward bolstering performance of the Luxury segment, which accounted for 40.5% of Coty’s revenues in the second quarter.

Will Momentum Sustain Amid Barriers?

We note that Coty is boosting its end-to-end digital transformation efforts like e-commerce across its divisions and region. The buyout of the leading online peer-to-peer social selling platform, Younique is a major evidence of Coty’s focus on connecting with customers through e-commerce. Further, the company is making progress with COVERGIRL brand through its Custom Blend app. Apart from these, the company’s partnerships with major retailers like Tmall and JD.com have also been lucrative. Needless to say, the company has been taking great strides in boosting e-commerce sales, which was well reflected in Coty’s second-quarter performance. E-commerce is expected to remain a vital performance driver in the forthcoming periods.

Also, the company has made several acquisitions to enhance its brand portfolio. In this regard, the company concluded the buyout of the iconic Burberry brand in the second quarter of fiscal 2018, which largely fueled Coty’s Luxury segment’s performance in the second quarter of fiscal 2019. Additionally, Coty is progressing well with the integration of P&G’s PG Beauty Business. Simultaneously, the company is focusing on investing in brands and transforming digital capabilities to drive sustainable growth. The company is encouraged by the progress it made in the last two years and targets realizing nearly $750 million of synergies, driven by cost, procurement, supply chain and SG&A savings, by 2020. These factors are likely to help the company reach its medium-term target of high-teen adjusted operating margin that was announced earlier.

However, we note that Coty has long been struggling with persistent sluggishness at its Consumer Beauty segment, which has been posting soft organic sales. The segment remained pressurized in the second quarter of fiscal 2019, wherein revenues plunged 15% to $967.8 million, and like for like (LFL) or organic sales declined 7.3%. Results were hurt by supply-chain disruptions, including customer penalties and increased promotions. Further, persistent softness in mass beauty categories in the United States and Europe dented results.

Nonetheless, management is working toward enhancing the performance of this segment along with mitigating supply-chain issues. We believe that such efforts and Coty’s other growth drivers will help the company sustain the regained momentum.

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