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Will Coty (COTY) Continue Its Impressive Run in the New Year?

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Coty Inc. (COTY - Free Report) looks prim on its sound fundamentals and growth endeavors that bring enough optimism to retain the robust stock performance in the new year. Shares of this New York-based company have advanced as much as 74.9% year to date, outpacing the industry’s growth of 49.3%. Further, this Zacks Rank #3 (Hold) stock has comfortably surpassed the Consumer Staples sector and S&P 500 that rallied 18.2% and 26%, respectively.

Clearly, the stock is gaining momentum on the back of solid brand performance, innovations and strong consumer demand in the Luxury segment. Smooth execution of these initiatives is likely to keep the company’s vigor going in 2020.



Endeavors to Drive Stock Momentum

Coty’s Luxury segment has been performing remarkably. Net revenues in the segment inched up 1.7% to $806.7 million in the first quarter of fiscal 2020, while LFL revenues increased 4.4%. The unit’s performance was driven by growth in ALMEA and Europe regions, along with strength in the fragrance category. Fragrance sales were buoyed by brands like Burberry, Gucci, Hugo Boss and Chloe. Management is committed toward bolstering performance of the Luxury segment, which accounted for 41.5% of Coty’s revenues in the first quarter.

Also, the company has made several acquisitions to enhance its brand portfolio. In this regard, Coty’s buyout of the iconic Burberry brand, which was concluded in the second quarter of fiscal 2018, is noteworthy. This acquisition has been supporting growth in the Luxury segment. Other evidences in this regard include the buyout of Good Hair Day or ghd, which aided growth at Coty’s Professional Beauty segment in the last reported quarter. The company is benefiting from its acquisition of Procter & Gamble Company’s global fine fragrances, salon professional, cosmetics and retail hair color businesses, along with select hair styling brands (the P&G Beauty Business).

Apart from these, Coty is on track to turn around its operations. The company is building and streamlining operations, upgrading systems, optimizing manufacturing and logistics, and simplifying overall operations. Simultaneously, it is focused on investing in brands and transforming digital capabilities to drive sustainable growth. Prudent promotional tactics are an important part of the company’s efforts to build brands.

Moreover, management is committed to optimizing the overall cost structure, which is helping Coty witness margin expansion. Stringent cost control, along with adjusted gross margin expansion, contributed to Coty’s adjusted operating margin in the first quarter of fiscal 2020. During the quarter, adjusted operating margin came in at 8%, up 110 basis points. The company plans to keep undertaking efforts to eliminate unnecessary costs.

Wrapping Up

Coty’s Consumer Beauty segment has been posting soft organic sales for a while. Segmental results in the first quarter of fiscal 2020 were hurt by declines in Younique, which was divested on Sep 16. Region-wise, revenues in North America continued to be under pressure due to reduction in shelf space and persistent weakness in the mass beauty market. Further, revenues declined across color cosmetics, retail hair, body care and mass fragrances categories. Nevertheless, the company is focused on reviving this unit. As part of its transformation plans, it is increasingly spending on its working media strategies and priority brand country combinations. 

We believe that the aforementioned factors will offset the hurdles and help the stock to sustain momentum in the new year.

Key Picks

Sally Beauty Holdings, Inc. (SBH - Free Report) , with a Zacks Rank #1 (Strong Buy), delivered positive earnings surprise of 9.4% in the last reported quarter. You can see the complete list of today’s Zacks #1 Rank stocks here.

e.l.f. Beauty, Inc. (ELF - Free Report) , with a Zacks Rank #2 (Buy), delivered positive earnings surprise of 60.7%, on average, in the last four quarters.

Bed Bath & Beyond Inc. (BBBY - Free Report) has a long-term earnings growth rate of 6.4% and a Zacks Rank #2.

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