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Coty (COTY) Up 16.8% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Coty (COTY - Free Report) . Shares have added about 16.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Coty due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Coty’s Q3 Earnings Beat Estimates, Revenues Miss

Coty released third-quarter fiscal 2019 results wherein adjusted earnings of 13 cents per share were flat with the year-ago figure and surpassed the Zacks Consensus Estimate of 12 cents.

Coty generated revenues of $1,990.6 million, which came below the Zacks Consensus Estimate of $2,047 million. Moreover, the top line fell 10.4% year over year. Notably, sluggishness in the Consumer Beauty segment hurt the top line to a large extent. Nevertheless, organic (LFL basis) revenues slipped 3.7% due to a negative impact from changes in revenue recognition accounting and supply chain headwinds.

Adjusted gross margin contracted 140 basis points (bps) to 62.9% in the quarter under review. Although Luxury and Professional Beauty segments witnessed improvement in margins, the same was more than offset by a margin shrinkage in Consumer Beauty. Also, an unfavorable regional mix, change in revenue recognition accounting and soft margins at Younique brand dented margins.

Additionally, adjusted operating income was almost flat at $229.5 million on account of lower fixed costs, reduced stock compensation and lower A&CP spending. These upsides were countered by a weak top line and an unfavorable 5% impact from foreign currency headwind. Further, adjusted operating margin came in at 11.5%, expanding 120 bps from the year-ago quarter.

Segmental Details

Luxury: Net revenues in the segment slid 3.1% to $729.2 million due to changes in revenue recognition accounting and supply chain headwinds that hit the segment’s top line by roughly 1%. LFL revenues inched up 2.8%, driven by a robust performance in Burberry, Gucci, Hugo Boss and Calvin Klein. Further, the renewal of the Marc Jacobs fragrance license boosted growth in this segment. Adjusted operating income in the category came in at $126.1 million, up 26% on the back of lower cost of sales and fixed cost reductions.

Consumer Beauty: Consumer Beauty revenues dropped 17.8% to $840.3 million while LFL sales declined 10%. Results were hurt by supply-chain disruptions and changes in revenue recognition accounting. Also, a persistent softness in mass beauty categories in the United States and Europe was a drag. Moreover, performance of Younique was disappointing during the quarter. Adjusted operating income came in at $55.8 million, down about 42.7% from the prior-year quarter’s tally.
 
Professional Beauty: Net revenues in the segment amounted to $421.1 million, down 6.1% year over year and 0.6% on LFL basis. The unit’s performance was hurt by disruptions at Coty’s North American warehouse and reduced trade inventory for certain customers. Adjusted operating income in the category was $47.3 million, reflecting a rise of 57%.

Regional Results

On a regional basis, net revenues in North America declined 14% (down 13% on LFL basis) year on year and totaled $611.7 million. The segment’s performance was affected by changes in revenue recognition accounting along with softness in Consumer Beauty and Younique. Additionally, Professional Beauty in this region reported dwindling revenues due to lower trade inventory and supply chain disruptions.

Sales in Europe decreased 14% (down 5% LFL) to reach $837.9 million as improvements in Luxury and Professional Beauty segments were countered by weakness in Consumer Beauty. Sales in the ALMEA region were nudged up 1% to $541 million. Nevertheless, sales in the region improved 11% on LFL basis, courtesy of a solid momentum in Luxury and Consumer Beauty.

Other Financial Updates

Coty ended the quarter with cash and cash equivalents of $384.1 million and net long-term debt of $7,772.3 million.

During the third quarter, the company provided $213.7 million of net cash from operating activities and free cash flow of $142.1 million.

Outlook

Management is on track with efforts to revive the company on the growth trajectory although the same is likely to take some time. In this respect, the company is poised to improve the Consumer Beauty unit, which has long been on the downside. In doing so, the company is focusing on optimizing costs, simplifying its product portfolio and increasing brand investments. Further, it seeks to capitalize on the sturdy performance of the Luxury and Professional Beauty segments. It also intends to undertake initiatives to boost sales and margins in the near term. Further, management highlighted that it will soon come up with a strategic plan to restore its top line.

Additionally, the company still expects adjusted operating income (on constant currency basis) in fiscal 2019 to lie below the fiscal 2018 level. Adjusted operating income for fiscal 2019 is projected to be in the $950-$1 billion band at constant currency basis, which indicates strong bottom-line growth in the fiscal fourth quarter. The company anticipates positive free cash flow for fiscal 2019. Moving ahead, it anticipates fourth-quarter’s year-over-year top-line trend to echo the third quarter’s level.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Coty has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Coty has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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