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Coty's (COTY) Luxury Unit Strong, Consumer Beauty Woes Remain

Zacks Equity Research

Coty Inc. COTY is on a roll, courtesy of its strong Luxury unit and other endeavors. These upsides have helped shares of the company surge a whopping 77.3% in the past three months, easily crushing the industry’s growth of nearly 25%.



However, Coty continues to battle supply-chain hurdles. This was one of the reasons behind the company’s continued sluggishness in the Consumer Beauty segment during the second quarter of fiscal 2019. So, let’s see if Coty’s robust growth-driving initiatives can offset these hurdles and help sustain this Zacks Rank #3 (Hold) stock’s stupendous momentum.

Factors Keeping Coty Strong

Coty’s Luxury segment has been performing impressively for quite some time now, primarily backed by solid brand performances, innovations and strong consumer demand. Though revenues in this segment were hurt by supply-chain headwinds to some extent in the second quarter, other factors made up for it. 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, brands like Gucci, Tiffany, Chloe and Calvin Klein fueled growth. These factors along with fixed cost reductions also led to enhanced adjusted operating income. In fact, management is committed toward further bolstering performance of the Luxury segment.

Additionally, gains from buyouts have been largely benefiting Coty’s top line. The buyout of the iconic Burberry brand largely fueled the Luxury segment performance in the second quarter of fiscal 2019. The company has been also benefiting from the acquisitions of Good Hair Day or ghd, and Younique. Also, Coty acquired Procter & Gamble’s PG global fine fragrances, salon professional, cosmetics and retail hair color businesses along with select hair styling brands (the P&G Beauty Business). The company is on track with P&G Beauty’s integration. Moreover, the company successfully rationalized its portfolio with 14 brand reductions, in an attempt to simplify portfolio and undertake efficient allocation of resources.

Apart from this, the company is on track with transformation efforts. To this end, Coty is building and streamlining back office operations, upgrading systems, optimizing manufacturing and logistics, and simplifying overall operations. Simultaneously, the company is focusing on investing in brands and transforming digital capabilities to drive sustainable growth. Management is encouraged by the progress made in the last two years and targets realizing synergies worth nearly $750 million by 2020 on the back of cost, procurement, supply chain and SG&A savings.

Consumer Beauty — a Worry

Coty has been witnessing persistent sluggishness at its Consumer Beauty segment, which has been posting soft organic sales for the past few quarters. 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% year over year. Results were hurt by supply-chain disruptions, stemming from customer penalties and increased promotions, among other factors. Also, persistent softness in mass beauty categories in the United States and Europe dented results.

Well, Coty has been battling supply-chain hurdles for a while now. These headwinds lingered in the second quarter of fiscal 2019, wherein the company’s top line was hurt by soft performances of the Consumer Beauty and Professional Beauty segments, with supply-chain headwinds being a major concern. Notably, LFL revenues in the Professional Beauty segment dipped 0.8%, mainly due to supply-chain disruptions, which hurt the company’s OPI brands in North America and internationally.

While the company is on track to mitigate supply-chain issues and enhance the Consumer Beauty segment, full recovery may take time. Nonetheless, we believe that Coty’s robust aforementioned drivers and impressive e-commerce business are likely to help it keep the spectacular momentum alive.

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