Coty Rallies 24% In 3 Months: Can It Sustain The Momentum?

Coty Inc.’s (NYSE:COTY) has been steadily gaining from well-planned acquisitions and a strong foothold in the cosmetics industry, supported by leading brands. These factors have been fueling the top line of this cosmetics giant. The company’s shares have rallied 23.5% in the past three months, outpacing its industry’s gain of 17.3%.

However, the company is struggling with soft organic sales in Consumer Beauty segment, which dented overall performance.

So, let’s see if Coty’s growth drivers can help offset these obstacles and sustain the impressive momentum.

Efforts Driving Business Growth

Improved consumer confidence has not only been favoring higher spending on food and beverage items, but has also increased spending on personal care and cosmetic products. Such trends have been boosting Coty’s Luxury and Professional segments performance and have also encouraged the company to engage in business expansion, primarily through buyouts. In fact, Coty has made several strategic acquisitions to enhance its rich line-up of brands. In first-quarter fiscal 2018, the company’s top line improved more than 100% year over year, mainly driven by contributions from the P&G Beauty business buyout and positive synergies from the acquisitions of ghd and Younique. Other evidences in this regard include the buyout of 60% stake in LLC (which forms part of the Consumer Beauty segment).

Further, Coty is boosting end-to-end digital transformation efforts including e-commerce in its divisions and regions. The company has been making great strides, which has helped it witness healthy e-commerce sales growth in Consumer Beauty and Luxury segments in the first quarter.

Additionally, Coty is committed toward enhancing cost structure. This is well reflected from the fact that the company has been witnessing year-over-year growth in gross margin for four straight quarters now.

Consumer Beauty Segment: A Major Concern

Unlike the flourishing Luxury and Professional business segments, Coty’s Consumer Beauty category has been sluggish. The segment has been struggling against underlying challenges in North America, thanks to changing consumers’ preferences and a highly competitive environment. Soft market trends in major categories and reduced shelf space for few brands (in the United States and Europe) have been acting as deterrents for Consumer Beauty segment. Evidently, organic sales at this segment tumbled 8% in the first quarter, following declines of 6% and 10% in the third and fourth quarters of fiscal 2017, respectively.

Bottom Line

Nevertheless, we expect this Zacks Rank #3 (Hold) company to gain from strategic acquisitions and other business strengthening efforts. In fact, such efforts are likely to improve the performance of Coty’s Consumer Beauty segment and thereby aid the company’s growth trajectory.

Do Consumer Staples Stocks Grab Your Attention? Check These

Investors interested in the same sector may consider stocks such as Estee Lauder Companies Inc (NYSE:EL) , Conagra Brands Inc (NYSE:CAG) and Meredith Corporation (NYSE:MDP) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Estee Lauder came up with an average positive earnings surprise of 18% in the trailing four quarters. It has a long-term earnings growth rate of 12.5%.

Conagra Brands pulled off an average positive earnings surprise of 6.2% in the trailing four quarters. Also, it has a long-term earnings growth rate of 7%.

Meredith Corporation delivered an average positive earnings surprise of 7.1% in the trailing four quarters. It has a long-term earnings growth rate of 8%.

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