Persistent weakness in the Consumer Beauty segment has been eclipsing Coty Inc.’s COTY performance. Notably, the unit (which accounted for more than 46% of Coty’s top line), remained under pressure in the fourth quarter of fiscal 2018, wherein the company’s gross margin also remained soft.

Battered by these headwinds, shares of this New York-based company have lost approximately 37% in the past six months, underperforming the industry decline of 11.3% and S&P 500’s growth of 11.5%.

Moreover, unimpressive estimate revisions for the current and next fiscal seem to have hurt investors’ sentiment. Over the past 60 days, the Zacks Consensus Estimate for fiscal 2019 and 2020 moved down by 5 cents and 9 cents to 74 cents and 86 cents, respectively.

Obstacles in Coty’s Way

Softness in the Consumer Beauty unit has been an obstacle for Coty over a long period. The segment remained under pressure in the fourth quarter, wherein organic sales dropped 3.4% primarily due to supply chain disruptions. Additionally, the segment’s performance was hurt by Brazilian trucker strike, intense competition and persistent weakness in the mass beauty market in North America and Europe. Although management is working toward strengthening the segment, full recovery is likely to take time.

In fact, supply chain disruptions and higher freight expenses also induced Coty’s adjusted gross margin to contract 20 basis points in the last reported quarter. Moreover, the company expects supply chain disruptions due to logistics and manufacturing consolidation to weigh on its performance in first-quarter fiscal 2019, with a modest effect in the second quarter. In the first quarter, Coty is likely to witness a decline in its top and bottom line. This combined with its brand rationalization program is likely to result in a low-teen year-over-year decline in adjusted operating income in the quarter.

Will Strategic Efforts Aid Revival?

Coty’s Luxury and Professional beauty segments have been performing impressively for quite some time now, primarily backed by solid brand performances in key markets. In fact, these units continued to deliver impressive results in the fourth quarter, leading to organic revenue growth.

Net revenues from the Luxury unit rose 14.6% with organic revenue growth of 5.3%, courtesy of strength in Gucci, Tiffany TIF, philosophy, Chloe and Marc Jacobs brands. Further, the segment witnessed strong performances in Europe and North America, backed by growth in the United States, the U.K., China, France, Latin America and Travel Retail.

Meanwhile, the Professional Beauty segment depicted a stellar show on the back of higher revenues from the OPI brand as well as strength in North America and ALMEA. Moving ahead, management plans to continue bolstering performances of the Luxury and Professional Beauty segments by tapping the opportunities provided by brands in these categories.

These apart, the company made significant progress with reducing fixed costs base in the fourth quarter. Also, Coty announced a new cost-savings program, which is independent of its efforts to integrate the P&G Beauty business and is aimed at boosting the bottom line. This program is expected to result in gross savings of up to $150 million in the next three years alongside incremental $250 million of restructuring charges. Further, the company intends to re-invest a portion of these savings in areas such as digital and e-commerce.

Management is on track with business integration and savings objectives as well. Encouragingly, by the end of fiscal 2018, the company delivered upon the first half of the synergies target of $750 million and expects to realize the remaining by 2020.

We believe that such efforts will yield favorably and help win back investors’ confidence in this Zacks Rank #3 (Hold) stock.

2 Stocks to Watch
The Chefs’ Warehouse, Inc. CHEF pulled off an average positive earnings surprise of 57.2% in the trailing four quarters. It has a long-term earnings growth rate of 19% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inter Parfums, Inc. IPAR came up with an average positive earnings surprise of 18% in the trailing four quarters. It has a long-term earnings growth rate of 12.3% and a Zacks Rank #2 (Buy).

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