Coty Inc. (COTY - Free Report) has long been struggling with its Consumer Beauty segment, which accounted for about 41% of the company’s top line in the first quarter of fiscal 2019. Naturally, this weighed on the company’s results in the quarter. Results were also negatively impacted by supply-chain hurdles.
Well, softness in the Consumer Beauty unit has caused this Zacks Rank #4 (Sell) stock to crash 64% in a year compared with the industry’s decline of 18.1%. On the contrary, Coty’s Luxury and Professional Beauty segments have been putting up a solid show, which offers some respite.
Weakness in Consumer Beauty – a Major Hurdle
Coty’s Consumer Beauty segment has been posting soft organic sales for the past few quarters. Revenues at this segment plunged 20.6% to $828.8 million in the first quarter of fiscal 2019, while like for like (LFL) or organic sales declined 14%. Results were hurt by supply-chain disruptions, including customer penalties and increased promotions. These factors led to a sequential decline in the segment.
Also, underlying weakness owing to persistent softness in mass beauty categories in the United States and Europe dented results. Additionally, softness in certain developed markets, stiff competition and challenges associated with certain brands were deterrents.
Supply-chain hurdles dented Coty’s overall top line in the first quarter, wherein revenues tumbled 9.2% year over year and also lagged the Zacks Consensus Estimate. The company’s LFL revenues fell 7.7% mainly due to these hurdles, which hit LFL revenue growth by nearly 5%. The company’s supply-chain woes included disruptions related to warehouse and planning center consolidation (in Europe and United States). In fact, these had an adverse effect on all three business units.
Moreover, gross margin contracted 120 basis points due to supply-chain hurdles and escalated freight costs in the Consumer Beauty and Luxury divisions. While the company is on track to mitigate supply-chain issues, it is expected to be fully offset only by the third quarter of fiscal 2019. Markedly, Coty’s operating income in the second quarter is likely to dip moderately on account of currency woes and the remaining supply-chain obstacles.
Can Strength in Luxury & Professional Beauty Offset Hurdles?
Encouragingly, Coty’s Luxury and Professional beauty segments have been performing impressively for quite some time now, primarily backed by solid brand performances, innovations and strong consumer demand. Though revenues in these segments were also hurt by supply-chain headwinds to some extent in the first quarter, the units continued to witness underlying growth.
In the Luxury segment, underlying growth was backed by strength in Gucci, Tiffany, Chloe and MiuMiu brands. The company also witnessed sturdy results from Burberry, which will form part of Coty’s LFL base in the second quarter. Region-wise, the segment witnessed strong performances in Europe and emerging markets, especially Asia. Moving on, underlying growth in Professional Beauty was fueled by brands like Wella, and robust performances in ALMEA and Europe. Also, contributions from ghd drove underlying performance.
Going ahead, management plans to continue bolstering performances of the Luxury and Professional Beauty segments by tapping the opportunities provided by brands in these categories. Also, the company is working hard toward enhancing its Consumer Beauty segment, though full recovery is likely to take time. Evidently, Consumer Beauty segment LFL revenues are expected to fall at a high-single-digit rate in the second quarter.
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