Coty Inc. (COTY - Free Report) has not been able to gain investor confidence this earnings season. Although the recent acquisitions make them hopeful, higher marketing spend and fixed costs weigh on its earnings. Shares of the company have declined approximately 17.7% since its fourth-quarter fiscal 2017 results announced on Aug 22.
Moreover, this Zacks Rank #4 (Sell) stock has underperformed the industry over the past six months. Its shares plunged 16.9% compared with the industry’s gain of 8%. So what are the factors that derailed Coty? Let’s delve deeper.
Increasing Costs Weighs on Earnings
During the fourth quarter, Coty witnessed higher marketing investment to support acquisition-related momentum in the business as well as increased fixed costs. Consequently, adjusted operating margin contracted 480 basis points to 4.0% in the quarter. Management, however, claims that rise in marketing expenditures will aid revenue momentum in the forthcoming period.
Dismal Consumer Beauty Segment
The company’s Consumer Beauty segment has been sluggish for the last few quarters. Organic net revenue from the segment declined 10% for both the fourth quarter as well as for fiscal 2017. Also, the segment’s organic sales declined 6% in the third quarter due to negative price and mix impact.
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 in shelf space for a few brands like Astor. Though the company is working on improving the segment, the transition may take time.
To add to the company’s worries, the beauty segment is witnessing increasing competitive pressure and changing consumer preferences. In particular, declines in the retail nail, color cosmetics and hair color categories in the domestic market and mass fragrance in Western Europe and the United States are expected to impact business.
Although Coty has been gaining from the acquisitions of ghd and Younique, synergies from the same have not been sufficient enough to offset the increase in operating expenses. Moreover, the company’s organic revenues have remained under pressure owing to less significant segmental growth. As a result of the greater negativities impacting the stock, Coty is currently not a favorable pick for investors.
Still Interested in the Consumer Staples Space? Check These
Investors may instead consider better-ranked stocks such as Constellation Brands, Inc. (STZ - Free Report) , Nu Skin Enterprises, Inc. (NUS - Free Report) and Inter Parfums, Inc. (IPAR - Free Report) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (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%.
Nu Skin delivered an average positive earnings surprise of 10.8% in the trailing four quarters. It has a long-term earnings growth rate of 8.7%.
Inter Parfums delivered an average positive earnings surprise of 18.1% in the trailing four quarters. It has a long-term earnings growth rate of 12.3%.
Zacks' 10-Minute Stock-Picking Secret
Since 1988, the Zacks system has more than doubled the S&P 500 with an average gain of +25% per year. With compounding, rebalancing, and exclusive of fees, it can turn thousands into millions of dollars.
But here's something even more remarkable: You can master this proven system without going to a single class or seminar. And then you can apply it to your portfolio in as little as 10 minutes a month.
Learn the secret >>