Will Consumer Beauty Unit Hurt Coty (COTY) In Q2 Earnings?

Coty Inc. (NYSE:COTY) is slated to report second-quarter fiscal 2018 results on Feb 8, before the opening bell.

The question lingering in investors’ minds is, whether this leading beauty company will be able to pull off a positive earnings surprise in the to-be-reported quarter. Last quarter, it delivered a positive surprise of 42.9%. However, the company has a mixed record of surprises in the trailing four quarters, with an average earnings miss of 9.4%.

Let’s see how things are shaping up prior to the earnings announcement.

Strategic Buyouts & Initiatives to Drive Coty in Q2

Coty has been making several strategic acquisitions to enhance its brand portfolio, which have been augmenting its top line. Notably, the company’s top line surged more than 100% year over year in the previous quarter driven by contributions from the P&G Beauty business buyout. Contributions from the acquisitions of ghd and Younique also aided sales growth. In this regard, the company also concluded the buyout of its unique international license rights for Burberry Beauty luxury fragrances, cosmetics and skincare recently, which should further boost its performance.

For the second quarter, the Zacks Consensus Estimate for revenues of $2,473 million reflects growth of 7.7% from the year-ago reported figure.

Further, Coty holds a strong position in fragrances and color cosmetics, and has a solid regional presence in the skin & body care. Also, management keeps on introducing new products in response to shifting consumer preferences, and market new and established products through strategic advertising and merchandising. In this regard, the company’s major introductions of Gucci Bloom and Tiffany’s debut fragrance in the fiscal first quarter are noteworthy. It also launched new campaigns for HUGO BOSS and Marc Jacobs Daisy in the same time period.

Additionally, Coty is boosting its end-to-end digital transformation efforts including e-commerce across its divisions and regions. To this end, the company is making progress with COVERGIRL brand through its Custom Blend app, which helps customers to take a digital, social and influencer-led go-to-market approach and personalize and customize it as per desire.

Coty also remains committed toward enhancing its cost structure as well. This is quite evident from the company’s year-over-year growth in gross margin for four straight quarters now.

Possible Deterrents That Might Impact the Quarter

However, Coty’s Consumer Beauty segment has been sluggish for the past few quarters. It has been struggling due to underlying challenges in North America, changing consumers’ preferences and a competitive environment. Evidently, organic sales at this segment tumbled 8% in the first quarter on account of persistent softness in the global mass beauty market along with weakness in some brands like retail hair. Though the company is working toward improving the segment, the recovery is likely to take time. This remains a concern for Coty’s upcoming performance.

Analysts polled by Zacks expect earnings of 24 cents per share for the impending quarter. Though the consensus estimate has been stable in the past 30 days, it reflects a decline of 20% from the year-ago quarter.

What Does the Zacks Model Unveil?

Nevertheless, our proven model shows that Coty is likely to beat earnings estimates this quarter. A stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Coty has an Earnings ESP of +1.99% and a Zacks Rank #3, making us reasonably confident of an earnings beat.

Stocks With Favorable Combinations

Here are some other companies which, according to our model, have the right combination of elements to deliver an earnings beat.

United Natural Foods, Inc. (NASDAQ:UNFI) has an Earnings ESP of +5.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) has an Earnings ESP of +0.46% and a Zacks Rank of 2.

Campbell Soup Company (NYSE:CPB) has an Earnings ESP of +1.44% and a Zacks Rank #3.

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