COTY on Track With Strategic Growth Pillars Amid High Costs

Coty Inc. COTY maintains robust brand portfolio strength and demonstrates significant momentum in the global beauty market. The beauty products provider continues to progress with its strategic initiatives, which are proving effective. Through strategic partnerships, the company is expanding its market presence. However, COTY faces challenges in navigating a high-cost environment.
Let’s delve deeper.

Favorable Market Trends

The beauty space continues to stand out. Coty is well-positioned to capitalize on this favorable market environment. Management is benefiting from momentum in its core categories while achieving impressive results with product launches and gaining success in untapped areas. Consumers’ demand for fragrances, cosmetics and skincare products and their engagement in physical stores and online have been drivers.
These upsides boosted Coty’s third-quarter fiscal 2024 net revenues, which increased year over year and surpassed the Zacks Consensus Estimate. For the fiscal 2024, management anticipates LFL revenue growth to reach the higher end of its guidance range of 9-11% growth. This includes expectations for low-to-mid single-digit percentage LFL revenue growth in the fiscal fourth quarter.

What Else is Favoring Coty?

The Zacks Rank #3 (Rank) is benefiting from its focus on six strategic pillars, which include stabilizing Consumer Beauty make-up brands and mass fragrances; accelerating luxury fragrances and setting up Coty as a core player in prestige make-up; establishing a skincare portfolio in prestige and mass channels; strengthening e-commerce and Direct-to-Consumer (DTC) capabilities; growing presence in China via Prestige and certain Consumer Beauty brands; and setting Coty as an industry leader in sustainability.
Coty made several strategic partnerships to enhance its brand portfolio. On May 7, 2024, the company unveiled that it had signed a long-term license agreement with Lena Gercke to develop, produce, and distribute LeGer’s debut fragrance. On Feb 20, 2024, the company entered into a new license agreement with Etro to manufacture and distribute its signature fragrance lines and home scent collections beyond 2040. In its second-quarter fiscal 2024 earnings call, management highlighted that it signed a license with Marni, an Italian luxury brand, which complements the prestige portfolio.
Also, COTY is progressing with the All In to Win transformation program across five key work areas, driving notable improvement in cost, gross margins, sales growth and cash. In third-quarter fiscal 2024, the company generated savings of nearly $25 million, bringing the fiscal year-to-date total savings to more than $90 million. The company targets savings of $110-$120 million for the fiscal 2024.

Hurdles on the Way

Coty has been operating amid a challenging geopolitical and macroeconomic environment. In the third quarter of fiscal 2024, the company’s cost of sales came in at $487.8 million, up from $478.1 million reported in the year-ago quarter. The company’s SG&A expenses came in at $770.6 million, up from $720.4 million reported in the year-ago quarter.
The company’s advertising and consumer promotions (A&CP) spending reflected nearly 28% of sales, increasing nearly 1 percentage point. We note that the company is continuing to support core icons and invest in new launches. For fiscal 2024, management expects A&CP spending to be in the high 20 percentage level of sales. A rise in costs and expenses, if not controlled, might continue to dent the company’s margin and profitability in the upcoming quarters.
The company’s shares have dropped 18.5% in the past three months compared with the industry’s 18.2% decline.

Solid Food Bets

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Conagra Brands CAG, a consumer-packaged goods food company, currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for CAG’s current fiscal-year earnings indicates a decline of 5.1% from the year-ago reported figure.
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