Expansion In Prestige Division And Fragrance Launches Will Strengthen Future Market Position

Key Takeaways

• Strategic resource reallocation and distribution expansion in key markets aim to stabilize margins and drive long-term revenue growth.
  
• Focus on e-commerce and fragrance launches is expected to enhance market share, revenue, and earnings over time.
  
• Competitive pressures in the U.S., regional underperformance, and economic shifts threaten Coty's revenue, despite potential tax benefits and ongoing foreign exchange risks.

Catalysts

Manufactures, markets, distributes, and sells beauty products worldwide.

• The planned expansion of distribution in the Prestige division, particularly in the U.S. and emerging markets, is expected to boost Coty's revenue growth in fiscal '26 and beyond.
  
• Coty is focusing on driving growth through major blockbuster launches in the fragrance category, which could enhance both revenue and earnings.
  
• The company is strategically reallocating resources from less-performing regions, such as Asia Travel Retail, to stronger markets like the U.S., which may stabilize and improve net margins.
  
• Continued execution of savings initiatives with a target of $120 million in fiscal '25 is expected to bolster EBITDA margin improvements.
  
• Coty is leveraging its strength in e-commerce, demonstrating strong growth and market share gains, which is likely to positively impact revenue and earnings in the long term.

Coty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coty's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.0% today to 8.8% in 3 years time.
• Analysts expect earnings to reach $576.1 million (and earnings per share of $0.56) by about March 2028, up from $300.0 thousand today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 17003.9x today. This future PE is lower than the current PE for the US Personal Products industry at 26.3x.
• Analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.66%, as per the Simply Wall St company report.

Coty Future Earnings Per Share Growth

Risks

• Cautious inventory management by retailers, particularly in the Prestige Fragrance segment, has led to a gap between sell-out and sell-in, potentially impacting Coty's short-term revenue and sales growth.
  
• Structural challenges and competitive pressures in the U.S. Color Cosmetics market, including store closures and the preference for new indie brands over heritage brands, could negatively affect Consumer Beauty revenue.
  
• Underperformance in key regions such as China and Travel Retail Asia, which represent 20% of the business, continues to impact overall sales, particularly in the Prestige segment, leading to lower-than-expected revenue growth.
  
• Economic uncertainties, shifting consumer behaviors, and changes in retailer channels, including increased market share by e-commerce platforms like Amazon, could impact Coty's traditional revenue streams and overall market share.
  
• Despite potential tax benefits from operational adjustments, Coty's exposure to foreign exchange risks and currency fluctuations could further strain net margins and overall profitability.

Valuation

• The analysts have a consensus price target of $8.365 for Coty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.5, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.5 billion, earnings will come to $576.1 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $5.85, the analyst price target of $8.36 is 30.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.