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Can Coty's (COTY) Saving Efforts Pare Supply Chain Hurdles?

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Coty Inc. (COTY - Free Report) has been gaining from impressive performances of the Luxury and Professional beauty segments. Further, the company’s transformational and saving initiatives bode well. In spite of the upsides, investors remain on the sidelines, thanks to sluggishness in the company’s Consumer Beauty segment, stemming mainly from supply chain disruptions. Evidently, the company’s shares slumped 33.3% in the past six months compared with the industry’s 5.1% fall. Let’s take a closer look at these aspects impacting the performance of this Zacks Rank #3 (Hold) company.



Luxury & Professional Beauty Segments Drive Sales

Coty’s Luxury and Professional beauty segments have been performing impressively for quite some time, primarily backed by solid brand performances in key markets. During the fourth quarter of fiscal 2018, net revenues from the Luxury unit rose 14.6%, with organic revenue growth of 5.3%. This was mainly backed by strength in brands like Gucci, Tiffany, philosophy and Chloe. Further, the segment witnessed strong performances across the United States, the U.K., China, France, Latin America and Travel Retail. Moving on, the Professional Beauty segment has also been depicting a stellar show on the back of higher revenues from the OPI brand as well as strength in North America and ALMEA. These factors aided the unit to surge 5.4% year over year during the fourth quarter. Going ahead, management plans to continue bolstering performances of the Luxury and Professional Beauty segments by tapping into the opportunities provided by brands in these categories.

Savings Efforts Bodes Well

Coty’s fiscal 2018 results demonstrated that the company is on course to turn around its operations, as it progresses with the integration of P&G’s Beauty Business. The company is on track with building and streamlining back office operations, upgrading systems, optimizing manufacturing and logistics as well as simplifying overall operations. Progressing ahead with such plans, the company targets to realize nearly $750 million of synergies driven by cost, procurement, supply chain and SG&A savings by 2020. Notably, it delivered upon the first half of its synergies target by fiscal 2018.

Along with fourth-quarter results, the company announced a new cost-savings program, which is independent of its efforts to integrate the P&G business and is aimed at boosting the top and the bottom lines. This program is expected to result in gross savings of up to $150 million in the next three years along with incremental $250 million of restructuring charges. The company intends to re-invest a portion of these savings in areas such as digital and e-commerce.

Headwinds Impacting Performance

Weakness in the Consumer Beauty unit has been a hurdle for Coty for long. In fact, the segment was under pressure in the fourth quarter of fiscal 2018, wherein organic sales dropped 3.4%, mainly due to supply chain disruptions. Moreover, the segment’s performance was hurt by Brazilian trucker strike, intense competition and persistent softness in the mass beauty market in North America and Europe. Though management is working toward enhancing the segment, full recovery is likely to take time.

Further, supply chain disruptions along with higher freight expenses, weighed upon the company’s adjusted gross margin during the fourth quarter. Unfortunately, the company expects supply chain disruptions, stemming from logistics and manufacturing consolidation, to have a impact on first-quarter fiscal 2019 results. This is likely to weigh on the company’s top and bottom lines in the upcoming quarterly results.

Final Thoughts

Undoubtedly, such downsides have dented investors’ optimism regarding the company’s performance, evident from its bearish run. Nevertheless, we are impressed with the company’s dedicated endeavors to boost savings combined with solid yields from Luxury and Professional units. We expect such factors to aid cushioning the aforementioned hurdles and trigger a turnaround in the price performance.

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