Coty Up More Than 35% in 3 Months, Luxury Unit a Key Driver

Coty Inc. COTY is gaining momentum on the back of solid brand performance, innovations and strong consumer demand in the Luxury segment. On the back of these upsides, shares of the company have surged 38.7% in the past three months against the industry’s decline of 1.3%. The stock has also outperformed the Consumer Staples sector that declined 1.5% and the S&P 500 Index’s rise of 7.9% in the same time frame. Further, this Zacks Rank #3 (Hold) stock has a long-term earnings growth rate of 5.5%.

Coty Gains From Luxury Unit

Coty’s Luxury segment has been performing impressively. Net revenues in the segment inched up 1.7% to $806.7 million in the first quarter of fiscal 2020 and like for like (LFL) revenues increased 4.4%. The unit’s performance was primarily driven by growth in ALMEA and Europe regions.

Moreover, strength in the fragrance category aided growth, buoyed by brands like Burberry, Gucci, Hugo Boss and Chole. The recent launch of new Tiffany & Love fragrances enabled the company to expand its portfolio in male and female categories. The company is already seeing strong demand for the same. Additionally, solid product additions to brands like Gucci and Hugo Boss are bolstering demand in the fragrance category.

However, geopolitical disturbances in Hong Kong and the nearby Travel Retail network are deterrents. Nevertheless, strong performance in other regions and commitment to bolster performance in the Luxury segment is likely to offset the impact of these headwinds.

Troubles in Consumer Beauty Unit

Coty’s Consumer Beauty segment has been posting soft organic sales for a while. Segmental results in the first quarter were hurt by declines in Younique, which was divested on Sep 16. Region-wise, revenues in North America continued to be under pressure thanks to reductions in shelf space and persistent weakness in the mass beauty market. Further, revenues declined 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 expect the aforementioned growth drivers to offset these hurdles and help the company sustain its impressive momentum.

Top 3 picks

e.l.f. Beauty, Inc ELF, with a Zacks Rank #2 (Buy), has a long-term earnings per share (EPS) growth rate of 3.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Helen of Troy HELE, with a Zacks Rank #2 (Buy), has a long-term EPS growth rate of 7.6%.

Avon Products AVP, with a Zacks Rank #3, has a long-term EPS growth rate of 5%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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