Coty (COTY) Up 30.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Coty (COTY). Shares have added about 30.3% 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 the most recent earnings report in order to get a better handle on the important drivers.

Coty's Earnings Miss Estimates in Q3, Sales Down

Coty released third-quarter fiscal 2020 results, with the bottom line missing the Zacks Consensus Estimate and declining year over year. Nevertheless, the top line beat the consensus mark. However, the metric fell from the prior-year quarter’s figure.

Adjusted loss of 8 cents per share was wider than the Zacks Consensus Estimate of a loss of a cent. Moreover, the bottom line deteriorated on a year-over-year basis due to lower adjusted net income.

Coty generated revenues of $1,528 million, which surpassed the Zacks Consensus Estimate of $1,513.8 million. However, the top line fell 23.2% year over year. Currency translations negatively impacted revenues to the tune of 2.3% and organic (Like for Like or LFL basis) revenues slipped 19.5%. The downside was caused by weakness across all segments thanks to coronavirus-induced lockdowns.

Adjusted gross margin contracted 260 basis points (bps) to 60.3%, thanks to reduced volumes induced by the coronavirus outbreak. Also, higher excess and obsolescence expenses along with underutilization costs resulting from manufacturing plant closures were deterrents.

Adjusted operating income came in at $0.1 million, down from $229.5 reported in the year-ago quarter.  Adjusted operating margin came in at 0.0%, down from 11.5% reported in the year-ago quarter, thanks to reduced gross margin, fixed cost deleverage along with unfavorable foreign currency impact.

Channel-Wise Details

Luxury: Net revenues in the segment fell 22.7% to $563.9 million, while LFL revenues declined 26.3%. The downside was caused by closures of perfumeries, department stores as well as specialty retailers worldwide.

Consumer Beauty: Consumer Beauty revenues declined 28.3% year over year to $602.7 million while LFL sales fell 16.9%. In March, sales in the segment declined significantly thanks to reduced traffic in drugstores and mass retailers globally amid the coronavirus outbreak. Also, softness in the color cosmetic category was a headwind.   

Professional Beauty: Net revenues in the segment amounted to $361.4 million, down 14.2% year over year and 12% on a LFL basis. The unit’s performance was marred by shutdown of salons during March. Growth in ghd was not enough to offset declines in Hair and Nail product categories.

Segment Results

Net revenues in Americas declined 15% (down 19% on a LFL basis) year on year to $492.6 million. Sales in EMEA dropped 22% (down 20% at LFL) year over year to $550.6 million. Sales in the Asia Pacific region declined 37% (down 35% at LFL) year on year to $124.7 million. Net revenues in Professional dropped 14% (down 12% at LFL) year over year to $360.1 million.

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $1,278.5 million and net long-term debt of $9,172.0 million.

During nine months ended Mar 31, 2020, the company provided $204.5 million of net cash from operating activities.

On Mar 27, the company paid out a quarterly dividend of 12.5 cents per share. Further, in an attempt to perverse its cash amid the coronavirus crisis, management has decided to suspend its dividends until at least Apr 1.

Other Developments

On May 11, management formed a strategic partnership with a global investment firm, KKR, which resulted in an instant investment of $750 million by the latter via convertible preferred shares in Coty. Moreover, KKR and Coty are likely to sign a partnership deal for the Professional Beauty and Retail Hair businesses. Per the deal, KKR is expected to buy majority stake in the above mentioned business for an enterprise value of $4.3 billion.

The company also unveiled its plans to reduce fixed costs by $700 million over the next 30 months amid the coronavirus crisis. This will support Coty to remain on track to achieve its target to report mid teens operating margins by fiscal year 2023.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -72.22% due to these changes.

VGM Scores

At this time, Coty has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, 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 F. 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. It's no surprise Coty has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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