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Can Coty's Solid Strategies Help the Stock Revive in 2019?

Coty Inc. COTY has seen its shares plummet as much as 46% in the past three months, wider than the industry’s decline of 14.2%. The cosmetics biggie has been struggling with softness in its Consumer Beauty segment and supply-chain disruptions, which seem to be weighing on investors’ confidence. Nonetheless, Coty’s Luxury and Professional beauty segments are performing quite well. Also, the company’s efforts and transformation plans are noteworthy.



So, let’s delve deeper into both the aspects and see if this Zacks Rank #3 (Hold) stock can witness a turnaround.

Factors Acting as Hurdles

Coty has been grappling with 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 first quarter of fiscal 2019, wherein revenues at this unit plunged 20.6% to $828.8 million and like for like (LFL) or organic sales declined 14%. Results were hurt by supply-chain disruptions, including customer penalties and increased promotions. These factors led to a sequential decline in the segment.

Also, underlying weakness owing to persistent softness in mass beauty categories in United States and Europe dented results. Additionally, softness in certain developed markets, stiff competition and challenges associated with certain brands were deterrents. Though management is working toward enhancing this segment, full recovery is likely to take time. Evidently, Consumer Beauty segment LFL revenues are expected to fall at a high-single-digit rate in the second quarter.

In fact, Coty has been struggling with supply-chain hurdles for a while now. These headwinds lingered in the first quarter of fiscal 2019, wherein the company’s LFL revenues fell 7.7% mainly on account of supply-chain hurdles, which hit LFL revenue growth by nearly 5%. The company’s supply-chain woes included disruptions related to warehouse and planning center consolidation (in Europe and United States). This had an adverse effect on all three business units. Further, shortages from various external suppliers marred the Luxury unit that was also largely hurt by Hurricane Florence. Moreover, gross margin contracted 120 basis points due to supply-chain hurdles and escalated freight costs in the Consumer Beauty and Luxury divisions.

Will the Stock Revive?

Coty’s Luxury and Professional beauty segments have been performing impressively for quite some time now, primarily backed by solid brand performances, innovations and strong consumer demand. Though revenues in these segments were also hurt by supply-chain headwinds to some extent in the first quarter, the units continued to witness underlying growth. In the Luxury segment, underlying growth was backed by strength in Gucci, Tiffany TIF, Chloe and MiuMiu brands. The company also witnessed sturdy results from Burberry, which will form part of Coty’s LFL base in the second quarter. Also, contributions from ghd drove underlying performance. Management plans to continue bolstering performances of the Luxury and Professional beauty segments, by tapping the opportunities provided by brands in these categories.

Moreover, Coty is on course to turn around its operations, as it progresses with the integration of P&G’s PG Beauty Business. The company is on track with building and streamlining back office operations, upgrading systems, optimizing manufacturing and logistics, and simplifying overall operations. Simultaneously, the company is focused on investing in brands and transforming digital capabilities to drive sustainable growth. The company is encouraged by the progress it has made in the last two years. Moreover, Coty targets to realize nearly $750 million of synergies, driven by cost, procurement, supply chain and SG&A savings by 2020.

In fact, in fiscal 2018, Coty released synergies worth $225 million. The company is now focusing on delivering the remaining synergies, which are expected to drive operating income. The company also focuses on returning the business to LFL revenue growth. In fact, management expects Luxury and Professional beauty segments to revert to year-over-year LFL revenue growth in the second quarter of fiscal 2019 itself. These factors alongside the company’s stringent focus on cost management are likely to help the company reach its medium-term target of high-teen adjusted operating margin announced earlier.

Coty is on track to mitigate supply-chain issues that are expected to be fully offset only by the third quarter of fiscal 2019. Thus, it remains to be seen if Coty’s upsides can help the stock revive. Meanwhile, investors can count on Estee Lauder EL, which has a long-term growth rate of 11.9% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The Estee Lauder Companies Inc. (EL) : Free Stock Analysis Report
 
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