Coty (COTY) Down 26.3% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Coty (COTY). Shares have lost about 26.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Coty due for a breakout? 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 drivers.

Coty Surpasses Earnings and Revenue Estimates in Q2

Coty Inc. released second-quarter fiscal 2020 results, with earnings and revenues beating the Zacks Consensus Estimate. Further, the bottom line improved year over year, while the top line fell from the prior-year quarter’s figure.

Quarter in Detail

Adjusted earnings of 27 cents per share came ahead of the Zacks Consensus Estimate of 24 cents. Moreover, the bottom increased 13% year over year, which includes a one-time tax benefit.

Coty generated revenues of $2,345 million, which surpassed the Zacks Consensus Estimate of $2,342 million. However, the top line fell 6.6% year over year. Currency translations negatively impacted revenues to the tune of 1.6% and organic (Like for Like or LFL basis) revenues slipped 1.4%. Further, strength in Luxury and Professional Beauty LFL revenues was offset by weakness in the Consumer Beauty unit.

Adjusted gross margin expanded 130 basis points (bps) to 63.4%, courtesy of increased mix of higher-margin Luxury and Professional Beauty divisions. Also, robust gross margin expansion in the Luxury division aided the growth.

Additionally, adjusted operating income came in at $325 million, up 0.8% year on year. This includes negative currency impacts of nearly 2%. Adjusted operating margin came in at 13.9%, up 110 bps on the back of gross margin growth and stringent cost control.

Segmental Details

Luxury: Net revenues in the segment inched down 0.1% to $1016.5 million, while LFL revenues increased 1.3%. The unit’s LFL sales were driven by growth in ALMEA, Europe and Travel Retail. Robust product innovations in brands like Burberry, Gucci, Tiffany, Hugo Boss and Lacoste drove growth. However, lower holiday giftset activity in North America was a deterrent. Adjusted operating income moved up 5% to $185.8 million and adjusted operating margin improved 90 bps to 18.3%.

Consumer Beauty: Consumer Beauty revenues declined 17.4% to $799.7 million, while LFL sales declined 6.7%. Region-wise, revenues in North America were under pressure due to reductions 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. The segment posted an adjusted operating income of $48.7 million compared with an income of $54.1 million in the year-ago quarter.

Professional Beauty: Net revenues in the segment amounted to $528.8 million, up 0.6% year over year and 2.2% on a LFL basis. The unit’s performance was fueled by strength in Europe regions. Strength in ghd along with growth in the hair brands drove growth. Adjusted operating income in the category was flat at $90.8, while the margin contracted 10 bps to 17.2%.

Regional Results

On a regional basis, net revenues in North America declined 14.4% (6.3% on a LFL basis) year on year to $635 million. Sales in Europe dropped 2.4% (up 1.5% at LFL) to reach $1172.9 million. Sales in the ALMEA region declined 5.3% (down 1.7% at LFL) to $537.1 million.

Other Financial Updates

Coty ended the quarter with long-term debt of $7,205.9 million.

During the quarter, the company provided $422.1 million of net cash from operating activities and first half operating cash flow amounted to $462 million. Also, free cash flow for fiscal second quarter came in at $363.5 million. In the first of the fiscal, free cash flow was $317 million.

Further, the company paid out a dividend of 12.5 cents a share on Dec 27. Also, concurrent with its earnings release, Coty declared a dividend of 12.5 cents per share, payable on Mar 27, to shareholders of record as of Feb 18.

Other Developments

On Jan 6, Coty formed a long-term strategic partnership with Kylie Jenner to develop the latter’s beauty business into a global powerhouse brand. The company also unveiled a new sustainability strategy —Beauty that Lasts — which is a part of its Turnaround Plan.

Outlook

For fiscal 2020, management continues to expect net LFL revenues to be stable to slightly lower from the fiscal 2019 level. Further, it still expects adjusted operating income (at constant currency) to increase 5-10% year on year, after considering investments for brand growth. Adjusted earnings are likely to depict mid-single-digit growth. Free cash flow is likely to improve moderately year on year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -15.34% due to these changes.

VGM Scores

Currently, Coty has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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 these revisions 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.