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Coty (COTY) Up 10.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Coty (COTY). Shares have added about 10.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Coty due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Coty’s Q4 Earnings in Line, Revenues Miss Estimate

Coty released fourth-quarter fiscal 2019 results, wherein adjusted earnings of 16 cents per share improved 14.3% from the year-ago quarter’s figure and were in line with the Zacks Consensus Estimate.

The company generated revenues of $2,115.4 million, which missed the Zacks Consensus Estimate of $2,128 million. Moreover, the top line fell 8% year over year. Organic (LFL basis) revenues slipped 4.1% due to declines in the Consumer Beauty and Professional Beauty categories.

Adjusted gross margin expanded 20 basis points (bps) to reach 62.1%, courtesy of margin gains from the Luxury division. Markedly, the luxury unit constituted a greater proportion in the revenue mix.

Additionally, adjusted operating income came in at $257.1 million, up nearly 12% year on year. This was partially countered by negative currency impacts of 5%. Further, adjusted operating margin came in at 12.2%, up 220 bps from the year-ago quarter’s level.

Segmental Details

Luxury: Net revenues in the segment inched up 1.7% to $754.7 million, while LFL revenues increased 5.8%. The 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. Adjusted operating income in the category came in at $106.6 million, up 36% on the back of revenue growth and fixed-cost reductions.

Consumer Beauty: Consumer Beauty revenues dropped 15.2% to $902.4 million while LFL sales declined 11.5%. Results were hurt by persistent sluggishness in Younique, while trends in the core Consumer Beauty segments were stable. Adjusted operating income came in at $94.3 million, up about 1% from the prior-year quarter’s tally.

Professional Beauty: Net revenues in the segment amounted to $458.3 million, down 7% year over year and 3.1% on LFL basis. The unit’s performance was hurt by headwinds at Coty’s North American operations, arising out of de-stocking of key accounts. Adjusted operating income in the category was $57.2 million, remained stable year-on-year.

Regional Results

On a regional basis, net revenues in North America declined 14% (also on LFL basis) year on year and totaled $657.7 million. Sales in Europe fell 10% (down 4% LFL) to reach $866.1 million. Sales in the ALMEA region rose 2% (up 8% on LFL) to $591.6 million.

Other Financial Updates

Coty ended fiscal 2019 with cash and cash equivalents of $340.4 million and net long-term debt of $7,469.9 million.

During the fourth quarter, the company provided $188.2 million of net cash from operating activities and free cash flow of $92.5 million.

Further, the company announced a dividend of 12.5 cents a share, payable on Sep 30 to shareholders of record as of Sep 9.

Other Developments

On Jul 1, the company announced plans to improve operations in the Consumer Beauty unit, while enhancing performance in the Professional Beauty and the Luxury units. In doing so, the company is focused on bringing underperforming units back on growth trajectory as well as establishing efficient leadership and culture. These are likely to drive revenues and margins.

In a separate release, the company announced the decision to end its partnership with Younique, based on mutual agreement.  The terms related to this exit have not been disclosed. We note that Coty has been struggling with this brand for a while. Hence, exiting from the partnership is worthwhile. This is likely to help the company in concentrating on other lucrative business areas. Well, the company is on track with strategies for unlocking core value of its business.

Outlook

For fiscal 2020, management expects net LFL revenues to remain stable to slightly lower from fiscal 2019 level. Further, it expects adjusted operating income (at constant currency) to decline 5-10% year on year, after considering investments for brand growth. Adjusted earnings are likely to depict mid-single digit growth. Free cash flow is likely to improve moderately year on year.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -13.69% due to these changes.

VGM Scores

Currently, Coty has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Coty has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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