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Will Coty's (COTY) Robust Luxury Unit Revive the Stock?

Zacks Equity Research

Coty Inc. COTY has been treading on a rough path, thanks to headwinds stemming from weakness in the Consumer and Professional Beauty units. Nevertheless, this well-known cosmetics company has managed to stay afloat on the back of advancements in the Luxury category and e-commerce. Also, it is progressing well with transformational efforts to streamline overall business. Let’s delve deeper.

Key Growth Drivers

The company’s Luxury unit has been performing well for a while, backed by solid brand performances, innovations and strong consumer demand. In fact, 35.7% of Coty’s revenues in the fourth quarter of fiscal 2019 were generated from this segment. The unit’s performance in the said quarter was driven by growth in ALMEA and Travel Retail as well as advancements in China. Additionally, brands like Burberry, Gucci, Hugo Boss, Marc Jacobs and Calvin Klein performed well. Management continues to be committed toward bolstering performance in this segment, which will likely be a key growth catalyst.

Moreover, the company has been undertaking significant initiatives to boost e-commerce sales. This was reflected in Coty’s second- and third-quarter performances, wherein e-commerce sales continued to be strong in the Luxury segment. During the fourth quarter, e-commerce sales contributed 10% to revenues in the Luxury segment. Growth in the e-commerce space is also supporting other beauty companies such as Estee Lauder EL, Ulta Beauty ULTA and Helen of Troy HELE.

Sluggish Consumer & Professional Beauty Units

The Consumer Beauty segment has been posting soft organic sales since the past few quarters. The segment continued to be under pressure in the fourth quarter, wherein revenues dropped 15.2% year on year. Results were hurt by persistent sluggishness in Younique. Along with fourth-quarter earnings release, the company announced decision to end its partnership with Younique.

Additionally, the Professional Beauty unit has been sluggish thanks to headwinds at Coty’s North American operations, stemming from de-stocking of key accounts. Thanks to sluggishness in these categories, the company’s top line fell 8% year over year in the fourth quarter. Due to such headwinds, Coty’s shares have declined 4.8% in the past three months against the industry’s rise of 2.2%.



Will Efforts Uplift the Stock?

We note that Coty is on track with initiatives to revive the Consumer Beauty business. In this context, the company has implemented concrete plans to stabilize market share in key markets and reduce costs. Additionally, this Zacks Rank #3 (Hold) company is striving to streamline operations, upgrade systems as well as optimize manufacturing and logistics.

We expect such moves along with continued growth in the Luxury business and e-commerce platform to provide cushion to the aforementioned hurdles. That said, we expect such upsides to help the company regain position in investors’ good books.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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