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Can Coty’s (COTY) Strong Luxury Unit & E-commerce Pare Woes?


Weak Consumer and Professional Beauty Units are tarnishing Coty Inc.’s COTY image. Nevertheless, this well-known cosmetics company has managed to stay rooted 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 into these factors.

Luxury Segment & Online Sales are Upsides

Coty’s Luxury unit has been performing well for quite some time, primarily 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 Luxury unit’s performance 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. The unit’s gross margin was particularly strong in the quarter. Management continues to be committed toward bolstering performance in this segment, which will likely be a key growth catalyst.

Moreover, the company has been taking significant strides to boost e-commerce sales. This was reflected in Coty’s second- and third-quarter performances, wherein e-commerce sales maintained strong momentum in the Luxury segment. During the fourth quarter, e-commerce sales contributed 10% to revenues in the Luxury segment.

However, it contributed low-teens revenues in the Professional unit. Management also highlighted that e-commerce is picking up pace in the Consumer unit, wherein growth is primarily being witnessed across the United States and Asia. 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.

Consumer Beauty Unit Is a Pain

Coty’s 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, while trends in the core Consumer Beauty segment were stable. Moreover, along with fourth-quarter earnings release, the company announced the decision to end its partnership with Younique on mutual agreement.

Additionally, the company’s Professional Beauty unit has been sluggish thanks to headwinds at Coty’s North American operations, stemming from de-stocking of key accounts. As a result of sluggishness in these categories, the company’s top line fell 8% year over year in the fourth quarter. Thanks to such headwinds, Coty’s shares have plummeted 21.1% in the past three months against the industry’s rise of 6.4%.

Can Efforts Aid Revival?

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. Further, the company is undertaking prudent media investments. Additionally, this Zacks Rank #3 (Hold) company is striving to build and streamline operations, upgrade systems as well as optimize manufacturing and logistics. We expect such moves to revive the company’s sheen in its business and 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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