COTY Benefits From Focus on Growth Pillars Amid Cost Woes

Coty Inc. COTY continues to benefit from robust growth in the global beauty market, driven by a strong brand presence and consumer demand for fragrances, cosmetics and skincare. With a focus on six growth pillars, the company demonstrates a proactive approach to sustainable growth. Also, the company's commitment to strategic partnerships enhances its competitive position across the beauty market.
However, COTY encounters difficulties in managing a costly operating environment. Let's delve deeper.

Focus on Core Priorities

The Zacks Rank #3 (Hold) company is benefiting from its focus on six strategic pillars, which include stabilizing Consumer Beauty make-up brands and mass fragrances; accelerating luxury fragrances and setting up Coty as a core player in prestige make-up; establishing a skincare portfolio in prestige and mass channels; strengthening e-commerce and Direct-to-Consumer (DTC) capabilities; growing presence in China via Prestige and certain Consumer Beauty brands; and setting Coty as an industry leader in sustainability.

In this regard, Coty is reaping benefits from the booming global prestige fragrance market. In third-quarter fiscal 2024, the company's prestige fragrance net revenues increased 12% Like-for-like, supported by several growth engines and strength in existing icons along with contributions from new launches. Coty's e-commerce channel saw a net revenue growth of nearly 20% in the quarter, following a rise of more than 20% in the first half of fiscal 2024.

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Strategic Partnerships

COTY made several strategic partnerships to enhance its brand portfolio. On May 7, 2024, the company unveiled that it had signed a long-term license agreement with Lena Gercke to develop, produce and distribute LeGer's debut fragrance. On Feb 20, 2024, the company entered into a new license agreement with Etro to manufacture and distribute its signature fragrance lines and home scent collections beyond 2040. Earlier, management highlighted that it signed a license with Marni, an Italian luxury brand, which complements the prestige portfolio.

High Costs: A Hurdle

Coty is operating amid a challenging geopolitical and macroeconomic environment. In third-quarter fiscal 2024, the company's cost of sales came in at $487.8 million, up from $478.1 million reported in the year-ago quarter. The company's SG&A expenses came in at $770.6 million, up from $720.4 million reported in the year-ago quarter. COTY's advertising and consumer promotions (A&CP) spending reflected nearly 28% of sales, increasing nearly 1 percentage point. We note that it is continuing to support core icons and invest in new launches. For fiscal 2024, management expects A&CP spending to be in the high 20 percentage level of sales.

A rise in costs and expenses, if not controlled, might continue to dent the company's margin and profitability in the upcoming quarters. The company's shares have dropped 11.8% in the past three months compared with the industry's 17.5% decline.

Wrapping Up

While COTY faces challenges from a high-cost operating environment, its strategic focus on six growth pillars and strong partnerships position it well in the global beauty market. Navigating through economic uncertainties will require prudent cost management strategies to safeguard profitability.

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