Why Coty (COTY) Should Be Dropped From Your Portfolio Now?

Of late, the Consumer Staples sector has been witnessing rising consumer confidence, backed by improving economic and labor market conditions as well rising GDP numbers. This has further triggered an increase in consumers spending power. Apart from purchasing essential items such as grocery, food and beverage products, consumers are also seen to spend heavily on apparel items, personal care and beauty products. Moreover, luxury spending is also aided by the increasing preference for e-commerce.

While such trends have been benefiting cosmetics companies like The Estée Lauder Companies Inc (NYSE:EL) and Nu Skin Enterprises Inc (NYSE:NUS) , other companies in the industry are still struggling with competitive pressures. One such company is Coty Inc (NYSE:COTY) . We observed that Coty’s shares have declined close to 14% since it announced its fourth-quarter fiscal 2017 results on Aug 22. Moreover, the company’s shares have declined more than 9% in the past six months against the industry’s gain of 11.3%.

Headwinds Impacting the Company

Although the company’s strategic acquisitions, including ghd and Younique, have aided its top-line expansion, such measures have also increased the company’s marketing spending and have led to an increase in its fixed cost structure.

In addition to increased operational expenditures, Coty’s segments have not depicted growth during fiscal 2017. In fact, its Consumer Beauty segment has remained sluggish since the past few quarters. 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 few brands like Astor.

Additionally, increasing competitive pressure and changing consumer preferences have been hurting the company’s performance. In particular, declines in the retail nail, color cosmetics and hair color categories in the United States and mass fragrance in Western Europe and in the domestic market are expected to impact business.

Dismal Earnings Trend & Estimate Revisions

We note that Coty has missed the Zacks Consensus Estimate in three out of the trailing four quarters, with an average negative surprise of 27.7%. Sales have also lagged estimates in two out of the past four quarters.

Estimate revisions have also been down trending owing to ongoing challenges. Estimate for the forthcoming first-quarter fiscal 2018 has declined 18 cents to reach 7 cents, in the past thirty days, while the same for fiscal 2018 has also gone down 22 cents to reach 69 cents.

Coty’s Scorecard

Some of the key financial ratios of Coty are also observed to be weaker than the industry, as depicted in the scorecard below.

Final Thoughts

Although Coty has been working towards improving its segments and achieving a turnaround from its sluggish performance, the transition is expected to take time. Further, Coty carries a VGM Score of D and a Zacks Rank #4 (Sell), indicating that the stock is currently not a safe pick for investors.

Looking For Consumer Staples Stock? Check This

Constellation Brands, Inc (NYSE:STZ) carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Constellation Brands delivered an average positive earnings surprise of 11.7% in the trailing four quarters. It has a long-term earnings growth rate of 18.2%.

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