Will Supply Chain Hurdles Show on Coty's (COTY) Q2 Earnings?

Coty Inc.COTY is slated to come up with second-quarter fiscal 2019 results on Feb 8. This cosmetics giant's earnings have outperformed the Zacks Consensus Estimate by an average 24.7% over the trailing four quarters. Let's see how the company is positioned ahead of the upcoming quarterly results.

Coty Inc. Price and EPS Surprise

Coty Inc. Price and EPS Surprise | Coty Inc. Quote

What to Expect?

The Zacks Consensus Estimate has moved down by a notch in the past 30 days to 22 cents, which reflects a 31.3% slump from the year-ago quarter's reported figure. Further, the consensus mark for revenues is at $2,472 million, depicting a drop of 6.3% from revenues recorded in the year-ago quarter.

Factors That Pose Worries

Coty has been struggling with supply chain hurdles, which also resulted in a 7.7% drop in like for like (LFL) revenues in the first quarter of fiscal 2019. The hurdles included disruptions related to warehouse and planning center consolidation, in Europe and the United States. This also had an impact on all three business units. Further, shortages from various external suppliers affected the Luxury unit, which was also largely hurt by Hurricane Florence.

Moreover, gross margin contracted 120 basis points due to problems pertaining to the supply chain and escalated freight costs for the Consumer Beauty and Luxury divisions. While the company is working on addressing the supply chain issue, it is expected to be fully addressed by the third quarter of fiscal 2019. Markedly, Coty's operating income in the second quarter is likely to drop moderately on account of currency woes and the residual supply-chain obstacles.

Talking of the Consumer Beauty segment, the unit has been witnessing persistent sluggishness and has been posting soft organic sales for the past few quarters. The segment remained under pressure in the first quarter of fiscal 2019, wherein its revenues plunged 20.6% to $828.8 million, whereas LFL or organic sales declined 14%. Results were hurt by supply chain disruptions, including customer penalties and increased promotions. Also, underlying weakness owing to persistent softness in mass beauty categories in United States and Europe dented results. Additionally, softness in certain developed markets, stiff competition and challenges associated with certain brands were deterrents. Though management is working toward enhancing this segment, full recovery is likely to take time. The Consumer Beauty segment LFL revenues are expected to fall at a high single-digit rate in the second quarter.

These factors make us apprehensive about Coty's performance in the quarter to be reported.

Can the Upsides Offer Cushion?

Coty's Luxury and Professional beauty segments have been performing impressively for quite some time now, primarily backed by solid brand performances, innovation and strong consumer demand. Though revenues in these segments were 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. Region-wise, the segment witnessed strong performance in Europe and in emerging markets, especially Asia. Moving on, the Professional Beauty underlying growth was fueled by brands like Wella and robust growth in ALMEA and Europe. Also, contributions from ghd drove underlying performance. Going ahead, management plans to continue boosting the Luxury and Professional Beauty segments by tapping brand opportunities in these categories.

Also, Coty is on track with its Transformation Plan and is focused on building and streamlining back office operations, upgrading systems, optimizing manufacturing and logistics, and simplifying overall operations. Simultaneously, the company is focused on investing in brands and transforming digital capabilities to drive sustainable growth. These factors along with gains from buyouts and cost-saving efforts are likely to reflect in the quarter-to-be-reported results. However, we believe that the headwinds may not be offset completely.

What the Zacks Model Unveils

Our proven model doesn't show a beat for Cotythis earnings season. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Though Coty carries a Zacks Rank #3, its Earnings ESP of -6.15% makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to pos t earnings beat:

Lamb Weston LW , a Zacks #2 Ranked company, has an Earnings ESP of +1.42%. You can see the complete list of today's Zacks #1 Rank stocks here .

Nomad Foods NOMD has an Earnings ESP of +1.45% and a Zacks Rank of 2.

Newell Brands NWL , a Zacks #3 Ranked stock, has an Earnings ESP of +7.41%.

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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.

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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