Coty's Turnaround Plans Robust, Consumer Beauty Unit Hurts

Coty Inc. COTY is strongly focused on its transformation plan to bring a turnaround to its operations. Further, the company has been gaining from its buyouts and efficient saving efforts. Incidentally, with its third-quarter fiscal 2020 results, management announced an expansion to its turnaround plan, per which it intends to cut fixed costs by 25% or $700 million in the next 30 months. However, Coty’s Consumer Beauty division has been posting soft organic sales for the past few quarters, including the third quarter, wherein the company’s overall revenues were hampered by coronavirus-led concerns.

During the quarter, both top and bottom lines declined year over year. Results were hurt by soft revenues, reduced gross margin, currency headwinds and escalated fixed costs. Revenues were hampered by weakness across all segments and channels, stemming from coronavirus-led concerns like salon closures, retail store closures and receding traffic at the stores that were open in March. Moreover, restricted air travel has been a blow to the travel retail network.

The Consumer Beauty segment continued to be under pressure in the quarter, with revenues down 28.3% year over year to $602.7 million and LFL sales tumbling 16.9%. In March, sales in the segment declined significantly, courtesy of reduced traffic in drugstores and mass retailers globally due to the coronavirus-led lockdown. Also, softness in the color cosmetic category was a headwind as consumers’ preference shifted toward more important personal care categories.

Thanks to such concerns, shares of Coty have declined 28.3% in the past three months against the industry’s growth of 18.9%.

The Brighter Side

While Coty saw soft sales in the third quarter due to the coronavirus-led concerns, its e-commerce business was quite strong. E-commerce sales surged across all segments. In the Americas and the EMEA, e-commerce sales were particularly strong for the mass business. Even APAC and Professional segments saw e-commerce growth amid the pandemic. Such trends along with a continued focus on innovation bode well.

Apart from this, Coty has made several acquisitions to enhance its brand portfolio. Recently, the company announced a partnership with one of the most influential celebrity, with nearly 300 million followers on social media platforms, Kim Kardashian West. Per the deal, Coty will buy a 20% ownership stake in Kim Kardashian’s beauty business for $200 million. The partnership is aimed at introducing new beauty categories and expanding into new product lines for the beauty business. The deal is expected to be closed in third-quarter fiscal 2021.

Further, Coty acquired a 51% stake in King Kylie this January and entered into a deal to produce, promote, distribute and sell certain products of King Kylie. Apart from this, the company’s buyout of the iconic Burberry brand in the second quarter of fiscal 2018 has been yielding results. Additionally, the company’s buyout of Procter & Gamble’s PG global fine fragrances, salon professional, cosmetics and retail hair color businesses along with select hair styling brands (the P&G Beauty Business) has been generating favorable results for quite some time.

Certainly, Coty is on course to turn around its operations. The company’s latest move in this regard is its alliance with KKR. Incidentally, KKR and Coty entered into a contract for Coty’s Professional and Retail Hair businesses for an enterprise value of $4.3 billion. KKR will have a 60% stake in the separate entity while Coty will have 40% ownership. Notably, Coty is on track with building and streamlining 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.

We believe that such upsides are likely to help this Zacks Rank #3 (Hold) company counter the challenges in its path.

Cosmetic Stocks to Bet On

Helen of Troy HELE has a Zacks Rank #1 (Strong Buy) and a long-term earnings growth rate of 6.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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