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Can Coty's Acquisition Efforts Offset the Near-Term Woes?

Courtesy of acquisition strategies, product innovation and efforts to accelerate its e-Commerce business, Coty, Inc. COTY seems to be well positioned in the beauty industry. However, the company has been underperforming the Zacks categorized Cosmetics & Toiletries industry and the broader Consumer Staples sector. The stock declined 30.7% in the last one year due to sluggishness, particularly in the Consumer Beauty segment, changing consumer preferences and increasing competition. In the said time frame, while the industry declined 15.9%, the broader sector dipped 1.4%.

Let’s now look into the factors impacting the performance of this leading player in beauty industry.

Driving Factors

Coty holds strong position in fragrances and color cosmetics and has a strong regional presence in skin & body care. Therefore, the company continuously evaluates strategic acquisitions and new brand licenses to enhance its portfolio. It also consistently introduces new products in response to shifting consumer preferences, and markets new and established products through strategic advertising and merchandising. Further, the company is repositioning some of the brands in order to reconnect these brands with the consumers, building on their existing strong brand equity. These efforts are expected to steadily bring benefits to the company.

Coty also seeks to divest its non-performing brands to focus and utilize its resources in other promising areas. Coty is also boosting its end-to-end digital transformation efforts including e-Commerce across its divisions and regions.

Meanwhile, Coty has been undertaking acquisitions to boost sales and enhance its brand portfolio. In Apr 2017, Coty agreed to acquire the exclusive long-term global license rights for Burberry Beauty luxury fragrances, cosmetics and skincare, which will help the company in expanding the its premium offering in the prestige fragrances and cosmetics categories within the Luxury portfolio. In Feb 2017, the company acquired a 60% stake in Foundation, LLC which held the net assets of Younique, LLC. The stake in Younique is expected to strengthen the consumer beauty division’s color cosmetics and skin and body care product offerings. Last year, the acquisitions of Good Hair Day, which is popularly known as ghd, beauty business of The Procter & Gamble Company PG and the personal care and beauty business of Hypermarcas S.A., known as Brazil Acquisition, have helped the company to expand its portfolio as well as capitalize on its customer base.

Headwinds

Of late, the company has been facing various challenges. Most of its segments and geographies are showing sluggishness, particularly the Consumer Beauty segment.

Though the acquisitions of the P&G Beauty Business, Younique and the Hypermarcas Brands drove segment’s sales by more than 100% in the recently reported third-quarter fiscal 2017 results, organically, sales have declined 5%, primarily reflecting a negative price and mix impact, offsetting volume growth and currency tailwinds.

We note that the segment has been consistently witnessing underlying challenges, especially in North America, driven by a combination of weak market trends across several of its categories and some reduction of shelf space for a few brands like Astor.

Increasing competitive pressure and changing consumer preferences are also hurting the industry. In particular, declines in the retail nail, color cosmetics and hair color categories in the U.S. and mass fragrance in Western Europe and the U.S. are expected to continue to impact its business and the recovery might take some time.

Estimates Going Down

Despite upbeat third-quarter fiscal 2017 results, Coty has missed the Zacks Consensus Estimate in three out of the last five quarters. Further, analysts have become increasingly bearish on the stock over the last 60 days with estimates moving south. The Zacks Consensus Estimate for the upcoming quarter has declined from 11 cents to 10 cents over the said time frame.

Coty Inc. Price, Consensus and EPS Surprise

 

Coty Inc. Price, Consensus and EPS Surprise | Coty Inc. Quote

Coty Scorecard

Parameters

Coty

Industry

ROE

9.1%

17.5%

ROA

3.1%

5.3%

ROC

4.4%

8.1%

 

Stocks to Consider

Investors interested in the cosmetics industry may consider Estee Lauder Companies, Inc. EL and Inter Parfums, Inc. IPAR. Both the stocks carry a zzZacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While Estee Lauder has a long-term earnings growth rate of 11.9%, Inter Parfums has a long-term earnings growth of 12.3%.

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Inter Parfums, Inc. (IPAR): Free Stock Analysis Report
 
Coty Inc. (COTY): Free Stock Analysis Report
 
Estee Lauder Companies, Inc. (The) (EL): Free Stock Analysis Report
 
Procter & Gamble Company (The) (PG): Free Stock Analysis Report
 
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